Most Americans will eventually receive Social Security benefits. Each year, the Trustees of the Social Security Trust Fund release a lengthy report to Congress that assesses the health of this important program. The newest report, released back in April of this year, discusses the current financial condition and ongoing financial challenges that the program faces.
Highlights of Social Security
Social Security’s total cost is projected to exceed its total income (including interest) in 2020 and remain higher for the next 75 years. The U.S. Treasury will need to withdraw from trust fund reserves to help pay benefits. The Trustees project that the Old-Age and Survivors Insurance/Disability Insurance trust fund reserves or (OASDI) will be depleted in 2035, one year later than projected in last year’s report, unless Congress acts.
Once the trust fund reserves are depleted, payroll tax revenue alone should still be sufficient to pay about 80% of scheduled benefits for 2035, with the percentage falling gradually to 75% by 2093.
The OASI Trust Fund, when considered separately, is projected to be depleted in 2034. Payroll tax revenue alone would then be sufficient to pay 77% of scheduled benefits. These figures are unchanged from last year’s report.
The DI Trust Fund is expected to be depleted in 2052, 20 years later than projected in last year’s report. The significant depletion date change reflects the fact that both benefit applications and the total number of disabled workers currently receiving benefits have been declining over the past few years. Once the DI Trust Fund is depleted, payroll tax revenue alone would be sufficient to pay 91% of scheduled benefits.
Why is Social Security facing
Social Security is funded primarily through the collection of payroll taxes. Because of demographic and economic factors, including higher retirement rates and lower birth rates, there will be fewer workers per beneficiary over the long term, worsening the strain on the trust funds.
What is being done to address these challenges?
Currently, not much, but the reports urge Congress to address the financial challenges facing these programs soon, so that solutions will be less drastic and may be implemented gradually, lessening the impact on the public. Combining some of these solutions may also lessen the impact of any one solution.
Some Social Security reform proposals on the table are:
Raising the current Social Security payroll tax rate. According to this year’s report, an immediate and permanent payroll tax increase of 2.7 percentage points to 15.1% would be necessary to address the long-range revenue shortfall (3.65 percentage points to 16.05% if the increase started in 2035).
Raising or eliminating the ceiling on wages currently subject to Social Security payroll taxes ($132,900 in 2019).
Raising the full retirement age beyond the currently scheduled age of 67 (for anyone born in 1960 or later).
Reducing future benefits. According to this year’s report, to address the long-term revenue shortfall, scheduled benefits would have to be immediately and permanently reduced by about 17% for all current and future beneficiaries, or by about 20% if reductions were applied only to those who initially become eligible for benefits in 2019 or later.
Some financial advisors believe that although Social Security is not expected to be depleted until 2035, which means today’s retirees should not worry too much, those about 15 to 20 years out from retirement should start acting now to bolster their retirement savings should Congress fail to act. Social Security was initially envisioned as one leg of a three-legged stool, the other legs being pensions and personal saving. Other advisors increasingly see annuities as a solution to the challenges facing Social Security by serving as an income replacement to the looming cut in monthly social security benefits. However, at the present time, annuities have been a misunderstood, complex and frustrating option for individuals and many advisors recommend that annuities should not represent more than half of an individual’s retirement assets.
Lastly, whether you have been saving for your retirement for decades or whether you’ve had to deal with health issues or layoffs, it is important to periodically review your personal social security statement on the Social Security Administration website at www.ssa.gov.