Social Security Update
Because of its importance in most people’s retirement plans; we receive a lot of questions regarding the long-term viability of Social Security. Every year, the Trustees of the US Social Security trust funds provide their report on the current and projected financial status of Social Security.
You’d never guess by the scary headlines containing terms such as “crisis” and “future uncertain” that the latest annual report issued by the US Social Security Trustees showed a slight improvement in the program’s financial outlook. This improvement is attributed, in part, to the phase-out of two benefit claiming strategies, a policy decision contained in the Bipartisan Budget Act of 2015 (Budget Act) passed last November.
Keep in mind that there are two separate trust funds from which Social Security benefits are drawn: the Disability Income (DI) Trust Fund for disability benefits and the Retirement Trust Fund for retirement benefits.
Social Security projects it can continue to fully pay disability benefits until the third quarter of 2023. If no changes are made before the end of 2023, starting in 2024, the DI Trust Fund is expected to have sufficient assets to cover 89 cents on the dollar.
The Retirement Trust Fund is projected to provide 100% coverage of benefits until sometime in 2034. After that, the surplus in both Social Security trust funds is projected to be “depleted.” However, the payroll tax that Social Security will continue to receive from current workers will be sufficient to pay 79% of scheduled retirement benefits.
In other words, even if Congress does nothing to address this issue, in 17 years, Social Security will still have enough payroll tax coming in to cover almost 80% of the money it needs to cover benefits.
Social Security is facing a relatively small long-term funding issue because of two demographic factors. The first is that we are all living longer. In 1930, average life expectancy at birth was just 58 for men and 62 for women. As of 2014, it was more than 76 years for men and 81 for women, a gain of nearly two decades. As life expectancy continues to improve, Social Security will have to pay benefits to more individuals for more years.
The second factor is that generations coming behind the baby boomers have fewer members. During the post-war years of 1946–1964, the US birth rate spiked. That eventually meant that there were more people in the workforce contributing to Social Security, which supported prior generations. Starting in 1965, the US birth rate began to fall and that means fewer people in the workforce now contributing to Social Security, to support the large baby boomer generation before them.
Social Security’s long-term funding challenge has been known for decades. However, members of Congress are like the rest of us; if a problem isn’t immediately pressing, you tend to put it aside and turn your attention to other concerns. However, like the small leak in your roof, if you ignore the problem too long, there’s a good chance it will get bigger and more expensive to fix.
The good news is that at this point, “fixing” Social Security is not that expensive. The 2016 Trustees Report tells us that if we increased the payroll tax from 12.4% to 15%, we would solve the funding shortfall for Social Security for the next 75 years. We do not believe Congress will fix the problem by raising taxes alone. We believe it is more likely that a number of different factors will be adjusted slightly. But consider what if the payroll tax were the only thing changed. Since employers and employees split the 12.4%, each side currently contributes 6.2%. If both sides also split the increase in the actuarial deficit, it would amount to workers paying an additional 1.3% for the Social Security program.
In dollar terms, this means that if working Americans contributed $13 more for every $1,000 they earn, it would solve Social Security’s funding problem for the next 75 years. Because of its importance to American workers, most would be willing to pay a little more today to ensure that they – and their families – can count on Social Security in their later years.
Social Security is not “broken” or “bankrupt.”
The Retirement Trust fund can pay 100% of benefits until 2034.
We have nearly two decades to address the projected shortfall.
We believe that the most likely fix will involve a number of factors being adjusted slightly. Perhaps increasing or removing the cap on payroll taxes, increasing the full retirement age for younger workers, and possibly reducing benefits for higher net worth individuals.
Feel free to contact us if you have questions or would like to discuss your specific portfolio. We appreciate the continued confidence and the opportunity to serve you & your family.
Source: The 2016 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Insurance Disability Insurance Trust Funds. www.ssa.gov/oact/trsum/
Source: A Summary of the 2016 Annual Reports, Social Security and Medicare Boards of Trustees.
Source: US Social Security Administration website, “Social Security History” www.ssa.gov
The 2016 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Insurance Disability Insurance Trust Funds. www.ssa.gov/oact/trsum/