Social Security For Our Retirement?

Whenever I bring up Social Security in a class or within the context of retirement income conversation, half the time I get a response like “If it’s around” or “I’ll be lucky to get anything”. The year 2020 has also thrown a wrench into the whole funding of future Social Security benefits. The broad topic of Social Security for this article includes both the Old Age and Survivors Insurance (OASI) and Disability Insurance (DI).

So how do we know the health of Social Security and what Social Security might look like several years down the road into our retirement? Each Spring, the Trustees of the Social Security Trust Fund publishes their annual report on the financial status of the Social Security Trust Fund. There are six Trustees, four of whom serve by virtue of their positions in the Federal Government: the Secretary of the Treasury, the Secretary of Labor, the Secretary of Health and Human Services, and the Commissioner of Social Security. The other two Trustees are public representatives appointed by the President, subject to confirmation by the Senate. The two Public Trustee positions have been vacant since July 2015.

Coming directly from their May 2020 report, here are a couple of highlights:

Social Security and Medicare both face long-term financing shortfalls under currently scheduled benefits and financing. Both programs will experience cost growth substantially in excess GDP growth through the mid-2030’s due to rapid population aging.

The Old-Age and Survivors Insurance (OASI) Trust Fund, which pays retirement and survivors benefits, will be able to pay scheduled benefits on a timely basis until 2034, the same as reported last year. At that time, the fund’s reserves will become depleted and continuing tax income will be sufficient to pay 76 percent of scheduled benefits

The Disability Insurance (DI) Trust Fund, which pays disability benefits, will be able to pay scheduled benefits until 2065, 13 years later than in last year’s report. At that time, the fund’s reserves will become depleted and continuing tax income will be sufficient to pay 92 percent of scheduled benefits.

With each annual report, the Trustees include a 75-year projection of various financial statistics. One of those statistics include how much the Social Security payroll tax will have to increase in order to maintain the promised benefits throughout that 75 years period. This year’s report concluded:

The 75-year (2020-2094) actuarial deficit of the trust fund increased from 2.78 to 3.21 percent of taxable payroll since the 2019 report.

That means if the Social Security payroll tax were increased by 3.21% from where it is at today (12.4%), with all projections moving forward staying the same, the Trust Fund would be able to pay out FULL benefits for OASI to all of those who meet the qualifications at their predetermined amounts for the next 75 years. If nothing changes and the payroll tax levels stay where they are at today, as stated above, it will be in the year 2034 that today’s current $2.9 trillion reserve fund will be depleted, and the estimated Social Security payroll taxes collected in 2034 and beyond will be able to pay only 76% of scheduled benefits.

The projections and analysis in these reports do not reflect the potential effects of the COVID-19 pandemic on the Social Security programs. Coming from the Penn Wharton Budget Model (PWBM), they have identified several ways in which the COVID-19 pandemic has impacted costs and revenues. Two of the largest impacts in 2020 have to do with the decline in payroll taxes due to increased unemployment, and a decline in income earned on the securities held by the trust fund due to continued low-interest rates. Accounting for these, along with several other factors, the PWBM suggests that the Social Trust Fund will deplete several years earlier than 2034.

What does all of this mean for us? Changes to the Social Security program have to be made. These changes can only be done by Congress by passing new legislation. I wouldn’t be surprised to see the payroll tax amount go up and/or see the maximum income cap substantially increase. We could also see our children and grandchildren be able to start their Social Security benefits, not at age 62, but raised up to maybe 65 or 66 years of age.

Regardless of the changes, when it comes to the question if Social Security will still be there for you in your retirement, the answer is YES! The program is not going to disappear. If you are 50+ years of age, you will get what was promised to you. Today’s politicians cannot run on a campaign slogan of “I’m going to change your Social Security” and get elected or re-elected. It will be the future generations that are most likely going to experience a different Social Security system compared to what is out there today.

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