Social Security dips into trust fund – what does that mean for your future?

June 7, 2018

This week it was announced that Social Security was going to have to dip into their trust fund to meet their obligations for the first time in 36 years. This certainly sounds ominous and brings into question the long term solvency of Social Security. I am 47 and in about 20 years plan on claiming Social Security benefits. For others in that age range it might bring up the concern if they can count on Social Security as part of their retirement income portfolio.

 

To begin with, let’s make sure you understand how Social Security works. The basic premise is that the workers of today contribute a portion of their wages, currently 6.2% on the first $127,200 of salary and matched by the employer for a total of 12.4%, into the system and these contributions are used to pay the retirement benefits to current retirees.  The goal is to replace 40% of the income for the average worker.

 

The benefits you receive in retirement are based on your 35 highest wage earning years. The amounts you pay in are then used to calculate a benefit amount at full retirement age (FRA). This FRA ranges right now from age 66 to 67 depending on your age. You can claim benefits as early as 62 and this reduces your full benefit or you can claim as late as age 70 which then increases your benefit. There are other options available for non-working spouses, divorced spouses, surviving spouses, etc.… but for the purpose of this conversation let’s assume you are claiming benefits based on your work history.

 

Over the years, there has been more money paid into Social Security than have been paid out in benefits. As a result there is a Social Security trust fund which has continued to grow. As the demographics of the country have changed the work force as gotten smaller compared to the number of retirees (this is due to several factors, mainly longer life expectancies and the retirement of a large number of baby boomers). The result is that the amount paid out in benefits is now greater than what is being collected and we are having to dip into the trust fund to cover the current retiree benefits. This fund is quite large but the demographics show no sign of reversing.

 

The current projections indicate the trust fund can cover its obligations until 2034. That sounds dire for people looking to claim benefits in 20 years. This does not mean though that Social Security will go broke. Remember, there is ongoing collection of revenue from worker’s wages so the fund will continue to collect money. But once the trust fund is depleted the projections show that ongoing revenue will be sufficient to cover only 75% of retiree benefits.

 

So how can this be fixed? Like any financial equation, there are really only two ways to fix it, increase revenues or decrease costs. Revenues can go up by increasing the current 12.4% being collected or by collecting the tax on a greater amount of income.  In 2018, any income greater than $127,200 is not subject to Social Security taxes. On the other hand, costs can be reduced by cutting the amount of benefits or by making you wait longer to be able to claim benefits.

 

The Simpson-Bowles plan put together in 2010 contained proposals to address many of America’s long term financial concerns including Social Security. The plan called for the FRA to be raised to 69 and for all workers to pay the tax on 90% of their income up to $190,000 as a way to keep Social Security solvent.

In short, Social Security benefits are not going to go away but changes need to be made. Congress has shown a major aversion to addressing the financial issues facing the major government entitlement programs but action will be needed to keep Social Security benefits at their current level. Keep an eye on Congress over the next several years to see what steps are taken.

 

 

If you are concerned with how this impacts you contact a financial advisor to review your situation.

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