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The Facts About Social Security's Solvency

Is Social Security really going broke? The answer depends on your meaning of the word broke.

In this article, I'll give you the facts about the state of the Social Security Trust Fund, introduce you to some of the ideas to fix it and how all of this impacts the decision of when to claim your benefits. (For more, see: 5 Social Security Changes to Expect in 2018.)

The Social Security Trust Fund

Before diving into the solvency of the Social Security Trust Fund, let's first get an understanding of what it is. The Social Security Trust Fund actually consists of two separate funds. First is the Old-Age and Survivors Insurance Fund (OASI). The OASI is what pays our retirement and survivor benefits. It's what most of us think about when it comes to Social Security.

The second fund is the Disability Insurance Trust Fund, which, as the name suggests, pays disability benefits to qualified beneficiaries. Payroll taxes fund both of these accounts and interest earned on the Treasury securities the fund owns. The purpose of this money is to pay benefits and administrative costs to run the two funds.

The trust fund's only investments are Treasury securities guaranteed by the "full faith and credit" of the U.S. Government. As stated on the Social Security website, "A market rate of interest is paid to the trust funds on the bonds they hold, and when those bonds reach maturity or are needed to pay benefits, the Treasury redeems them."

Is Social Security Really Going Broke?

That brings us to the solvency question. Is Social Security really going broke? Below is a comparison of the 2016 and 2017 trust fund financial reports.

Remember, Social Security is a pay as you go system. Current retirees benefits get paid from current workers payroll taxes. As long as payroll taxes exceed benefit payments, the trust fund is in good shape. If that situation reverses itself, deficit spending is the result.

In 2016, the fund took in $35 billion more than it paid out. The trustees predict that the funds will continue operating with a surplus until 2021. Starting in 2022, trustees say the funds begin paying out more than they collect in taxes and interest. In 2034, the trust fund runs out of money. So, in technical terms, it's broke. However, as with most government programs, it isn't that simple. (For more, see: How Secure Is Social Security?)

What Happens After 2034

In simple terms, the reason the trust fund runs out of money is that workers who receive benefits take more than current workers pay into the system. Hence, the shortfall. However, that does not mean the benefits stop when the fund runs out of money. Why? Current workers still pay into the system.

According to trust fund estimates in the table above, revenues cover 77% of benefits in 2034 and 73% of benefits at the end of the 75-year reporting period. Is that a problem? Of course, it is. Can it be fixed? Of course it can.

Unfortunately, many retirees start their Social Security benefits at the earliest possible date thinking there won't be money available to them if they wait. Doing this can be a costly mistake. Waiting allows your Social Security benefit to grow by as much as 8% per year between your full retirement age and age 70. Carefully analyze your options before deciding on a claiming strategy. This article contains a list of some calculators to consider.

There are many good reasons to take benefits early. Fear of funds not being there should not be one of them.

Proposals for Fixing the Trust Fund

There has been much debate and discussion over how to fix the future deficit spending in Social Security. Here are some of what we've heard:

  • In 2017, the government withholds FICA taxes (Social Security and Medicare), on the first $127,200 of our earned income. In 2018, that threshold is $128,700. One proposal raises the maximum taxable income even higher. Another eliminates the threshold altogether. Either choice means more income gets taxed, raising the amount available to pay benefits.
  • Raising the retirement age is always on the table. Proposals range from age 67 to age 70. The result - working longer means higher tax revenue.
  • Lowering the cost of living adjustment (COLA) by using a different Consumer Price Index (CPI) measurement. Another proposal eliminates COLAs for higher income recipients.
  • Reducing benefits for higher wage earners. It isn't clear what level of income that is.

These are all reasonable proposals. Time will tell which, if any, get implemented. (For related reading, see: 10 Commonly Asked Questions About Social Security.)

What the Future May Hold

This isn't the first time we've been in this situation. Congress has always acted before catastrophe arrives. Even with the current Congressional dysfunction, I see no reason that won't happen this time. No Congressperson or Senator wants to be known as someone who voted against fixing Social Security. It would be political suicide.

Social Security offers a lifetime, inflation-adjusted income stream that you can't outlive. You've paid for it during your working years. There's no reason to believe you won't receive the promised benefits. Taking benefits early for fear of the funds not being available could be a costly mistake.

Though there's no guarantee, I believe Congress will act to shore up the trust fund and preserve this great program. Will everyone be happy with the changes made? Not likely. As with any legislation, some will like it. Some will not. However, I cannot imagine a situation where Congress would eliminate a program that currently pays over 61 million people (voters) benefits.

What do you think? Will Congress act? What changes do you think would help? How do you think these changes will affect you? (For more from this author, see: How Social Security COLAs Are Calculated.)