Is Social Security Going Broke?
Updated: Aug 4
A few weeks ago, I was meeting with a younger couple who anticipated not receiving any Social Security in the future. This is a very common concern for many people and one that I hear often. Their rationale is that Social Security is projected to be “broke” and will not be around when they retire. Although this has been pushing many younger people to save more (which is a good thing), it may not be completely accurate. Most people probably have heard or seen a headline that Social Security is estimated to be broke in 16 years–or by 2035–but do you know what that actually means? Below is a deeper dive on how Social Security is funded, what going “broke” actually means, and what to expect for the future of Social Security.
How is Social Security funded?
In 2018, Social Security had revenue of over $1.0 trillion. That revenue consists of payroll taxes from employees and employers, interest income on its reserves from government bonds, and taxes collected on benefits paid (income tax on Social Security). There was also slightly less than $1 trillion in expenditures last year for a total of a $3 billion dollar surplus (seems good!). That 3 billion dollars is then added to the reserves, which currently sits around $3 trillion (seems great!).
What is the future of Social Security?
So, what’s the big deal? Everything looks good, right? Why is everyone so concerned with Social Security going “broke” when we had a $3 billion dollar surplus last year and sit on $3 trillion of reserves?
The concern is that the Baby Boomer generation is starting to reach retirement age. This creates two problems that compound on one another. On one hand, the number of Americans taking benefits will greatly increase. We will also see fewer Americans working and paying taxes into Social Security. In other words, Social Security is expected to take in less money (taxes) and pay out more (benefits). Not a great combination! This problem is what leads economists to predict Social Security running out of money (reserves) by 2035. Thus, why people say that Social Security is going “broke” and won’t be around to pay out benefits in the future.
However, remember that every year Social Security receives revenue of taxes and interest. So even if Social Security does run out of money (reserves), it will still have annual revenue that will account for about 80% of its expenditures (benefits). This means that Social Security will technically always have money coming in which they are obligated to pay out as benefits. So unless the government stops collecting taxes, and I wouldn’t get your hopes up, there should be revenue coming in which will be paid out in the form of Social Security benefits.
How do we fix the reserve spend-down?
The shortfall of Social Security in 2035 can be a simple problem to fix IF (this is the real issue) Congress decides to make it a priority and stops kicking the can down the road. The sooner it is dealt with, the less painful it will be on all our wallets. The solutions are fairly straight-forward: lower benefit payouts, increase taxes, or some combination of both. Two possible scenarios include:
Projections show that an increase of Social Security tax by 2%, from 6.2% to 8.2%, will solve the shortage. This makes sense, as higher taxes equal more revenue.
Another solution would be to raise the maximum taxable earning cap. Currently only an individual’s first $132,900 is subject to Social Security tax. Raising this cap would bring in more revenue.
So what does this all mean?
The biggest takeaway is that Social Security should still pay out the majority of benefits in retirement, even well past 2035. If Social Security’s reserves were to be depleted, they still have revenue of about 80% of their annual payout. That would account for a 20% reduction in benefits by 2035. So as long as there is tax revenue, which seems likely, there will be benefits to be paid out. In the meantime, we can have some comfort knowing that as long as there is a tax, there will be Social Security benefits. As I told the younger couple weeks ago, increase your retirement savings, but I would also expect some Social Security to be around well past year 2035.
Evan Werckenthien, CFP©
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Source: Experian, Federal Reserve