Today there are over 64 million people receiving Social Security, yet fewer and fewer Americans have confidence that Social Security will be there for them when they retire. Over the past few years, benefits have exceeded income, resulting in a slew of media-hyped headlines ranging from “Social Security: It’s Even Worse Than You Think” to “Will Social Security Be There For You?” Considering all of the hype, we felt it was time to sort through all of the noise and get down to the facts of the matter.
We started our quest for truth by going straight to the source – the Social Security Administration itself. Every year the Social Security Administration publishes a report on the status of the trust funds that pay out Social Security benefits. The Social Security Administration has two trust funds – one that pays out retirement benefits and one that pays out disability benefits. Both of the funds are managed by the Department of the Treasury and invested in special securities issued by the United States Treasury, which means that the funds are backed by the federal government. As part of the report, the administration runs a series of three scenarios based on current funding levels and expected costs to determine when the funds are likely to run out of money. As of the most recent report, the low-cost scenario predicted that the funds would run out in 75 years while both the intermediate and high-cost scenarios predicted the funds running out in 20 years. Curiously, the administration’s problem of spending more than it makes is a fairly recent one. 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 it, 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. What all the doom and gloom articles fail to mention is that Congress knew the baby boomers were approaching Social Security age and, as such, in 1983 raised the payroll taxes to create a cushion of funding. For nearly 30 years the Social Security Administration brought in significantly more than it paid out, building a cushion to make up for the expected deficit.
At this point, it's important to note that when we mention Social Security running out, what we really mean is the cushion that is making up the deficit will run out. What it does not mean is that you would cease to receive any benefit at all. Consider this simple explanation: let's say that right now 100 people are receiving Social Security but only 75 people are paying into social security. That means that 25% of Social Security checks are being funded by money that was saved up during the last thirty decades. It's the cushion that's making up the 25% deficit that is expected to run out, however, even after it runs out individuals will continue to pay into the fund. In our simple example, what that means is after the cushion runs out we would return to 75 people paying into the fund and 100 people taking out of the fund leaving the fund 25% underfunded. It's not that your check will disappear if the cushion money runs out. Your check will just simply be less.
Given current trends, it is apparent that policy-makers will need to once again make a change to the way benefits work. Unfortunately, it’s tough to predict what direction this change may make. There are a variety of outcomes that could occur ranging from increasing payroll taxes, to increasing the retirement age, to creating a needs-based system – or possibly a combination of all of the above. What many fail to mention is that it is highly unlikely that social security will completely disappear. While policy-makers may be charged with “fixing” Social Security, they are elected by voters, a large portion of whom are either currently receiving or eligible to receive Social Security and those voters aren’t about to give up their 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." Based on the current political climate, it is likely that boomers will not 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.
CNBC. (May 8, 2015). Social Security: It's Even Worse Than You Think. retrieved from: http://finance.yahoo.com/news/social-security-even-worse-think-142833358.html
Desilver, D. (October 16, 2013). 5 Facts About Social Security. retrieved from: http://www.pewresearch.org/fact-tank/2013/10/16/5-facts-about-social-security/.
Miller, J. B. (July 9, 2013). Will Social Security Be There for You. retrieved from: http://www.marketwatch.com/story/will-social-security-be-there-for-you-2013-07-09
Social Security Administration. (2009). Social Security Trust Funds, Calendar Years 1937-2009. retrieved from: http://www.ssa.gov/history/tftable.html.
Social Security Administration. (May 2015). Monthly Statistical Snapshot, April 2015. retrieved from: http://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/.
Social Security Administration. Trust Fund FAQS. retrieved from: http://www.ssa.gov/oact/progdata/fundFAQ.html#a0=-1.