Steve Coker, CFP
Is Social Security Insolvent?
The Social Security Board of Trustees issued their annual report last month, announcing that in 2033 the Social Security system will be unable to fully pay scheduled benefits. At that point the Social Security fund’s reserves will be depleted, and ongoing ‘program income’ (mostly taxes) will only be sufficient to pay 89% of scheduled benefits. The release once again prompted media headlines such as, “Social Security: It’s Even Worse Than You Think” or “Will Social Security Be There For You?” So is the Social Security program insolvent? Perhaps the more important question is, “Will I get benefits?” We read the trustees report and here are some key lessons learned.
According to the Social Security Administration, “Solvency for the Social Security program is defined as the ability of the trust funds at any point in time to pay the full scheduled benefits in the law on a timely basis.” According to that definition, Social Security is currently solvent, but the trustees are raising a warning that, on an actuarial basis, something will need to change by 2033. However, this date is merely a projection, and is based on the trustee’s intermediate assumptions. Future taxes on wages, future inflation rates, life expectancy, and other factors could have a significant impact on the program.
Notably, for most of the life of the Social Security program, taxes have exceeded the benefits paid. From 1937 to 2009 there were only 11 years that the administration paid out more in benefits than it brought in with taxes which means that for the majority of those 72 years, benefits were funded in excess, which begs the question – what happened? As you may have guessed, the baby boomers, individuals that were born between 10 and 30 years after social security began, started coming of retirement age. An individual born in 1947 would have turned 63 in 2010 and not surprisingly, since 2010 social security has had a deficit in payments and income.
I believe that history is helpful. Social Security began as a ‘pay-as-you-go” system where taxes on current workers paid the benefits for the current retirees. In the beginning of the program there was no fund to source the benefits. Instead, there was merely tax revenue each year that paid the benefits each year. However, the Social Security Trustees rightly recognized the baby boom generation would represent a big problem for the program once the baby boomers reached retirement age. Therefore, in 1983 congress raised the payroll tax rate to create a cushion of funding. For nearly 30 years the social security administration brought in significantly more than it paid out. The problem is that benefits paid out continues to rise.
Given current trends, it is apparent that policy-makers will need to once again make a change to the way benefits work, which of course is a political hot button. In reality, there are only a few ways to solve the problem: raise taxes, shift money from other programs, or reduce benefits. Voters dislike all those choices, but math is math. At some point, politicians will be forced to do something to fix the problem. Unfortunately, it’s tough to predict what direction this change may take. Given the current political environment, it is likely we will see a combination of higher taxes and reduced benefits, mostly for younger generations. This would mean increasing payroll taxes, increasing the retirement age, or creating a needs based system – or all of the above.
What many fail to mention is that it is highly unlikely that social security will completely disappear. Social Security is very different from a pension program, where the assets in the pension fund are the source of the pensions. Taxpayers ultimately fund Social Security. While raising taxes is unpopular, so is reducing benefits. The most likely outcome is modest changes phased in over time. Will Social Security Be There for you? Unfortunately, the answer is ‘it depends.’ It is unlikely that boomers and those already receiving benefits will see a significant change to benefits. However, those who are younger will likely face a very different set of benefits than those available today. An apocalypse? No, but it raises the importance of saving now.