Is Social Security Going Broke?

Imagine that you are a passenger on a ship. The captain informs you that you are cruising at 20 miles per hour and are 100 miles from port. You calculate that this means that the ship will smash into the harbor in about five hours! Is it time to head for the lifeboats?

The Board of Trustees of the Social Security and Medicare Trust Funds recently published their annual report on the status of the Social Security and Medicare programs. As always, the report explained that the trust funds "face significant financing issues"i and, as always, the media weaponized the data into the catastrophist headline that the programs are going to be bankrupt soon. As always, I will try to provide our perspective on this issue to help you see through the headlines and plan accordingly.

How Social Security Benefits Are Funded

First, anyone who is curious about this situation should understand that Social Security is financed through two sources:

  • The program Trust Funds, which are the focus of the present analysis, and
  • Federal Insurance Contributions Act (FICA) taxes which are collected from employees and employers.

As long as payroll taxes are collected as required by law, neither Social Security nor Medicare can run out of money. FICA taxes currently cover about 80% of benefits paid, while the program Trust Fund covers the other 20%. If the Trust Funds were to become depleted, under the current conditions, recipients could see their benefits reduced by about 20% or the portion presently paid by the Trust Fund.

The following passageii is excerpted unredacted from the Trustees' report.

Based on our best estimates, this year's reports show that:

  • The Old-Age and Survivors Insurance (OASI) Trust Fund will be able to pay 100 percent of total scheduled benefits until 2033, unchanged from last year's report. At that time, the fund's reserves will become depleted and continuing program income will be sufficient to pay 79 percent of scheduled benefits.
  • The Disability Insurance (DI) Trust Fund is projected to be able to pay 100 percent of total scheduled benefits through at least 2098, the last year of this report's projection period. Last year's report projected that the DI Trust Fund would be able to pay scheduled benefits through at least 2097, the last year of that report's projection period.
  • If the OASI Trust Fund and the DI Trust Fund projections are combined, the resulting projected fund (designated OASDI) would be able to pay 100 percent of total scheduled benefits until 2035, one year later than reported last year. At that time, the projected fund's reserves will become depleted and continuing total fund income will be sufficient to pay 83 percent of scheduled benefits.(The two funds could not actually be combined unless there were a change in the law, but the combined projection of the two funds is frequently used to indicate the overall status of the Social Security program.)

Although this is not quite the catastrophic termination of benefits that the scariest headlines might have you believe, seeing a 20% reduction of Social Security benefits in ten years would be a major problem for a lot of people. Should the Trust Funds deplete, over 66 million beneficiaries, particularly low-income retirees who rely heavily on Social Security for their income, would be impacted. Reductions could severely affect more than 30 million people who depend on Social Security for at least half of their income.

Perspective and Possible Solutions

The depletion of the Trust Funds is a relatively recent concern, with the present decline in asset reserves beginning sharply in 2010 following the Financial Crisis and during the Obama Administrationiii:

Over the past two decades, Congress has considered various proposals to address the impending shortfall in the Social Security Trust Fund. These proposals generally fall into two categories: increasing revenue (Democrats) and reducing expenditures (Republicans). There are many ways and combinations of ways to solve this problem. Here's an overview of some of the key ideas:

Increasing Revenue:

  • Raise the Payroll Tax Rate: One approach is to increase the payroll tax rate, which is currently 12.4% (split equally between employers and employees). A slight increase could significantly extend the solvency of the Trust Fund.
  • Lift the Payroll Tax Cap: Currently, payroll taxes are only collected on incomes up to a certain limit ($147,000 in 2022). Removing or increasing this cap would mean higherincome earners would contribute more.
  • Broaden the Tax Base: This could involve taxing other forms of income, not currently covered by the payroll tax, such as certain types of investment income.

Reducing Expenditures:

  • Increase the Full Retirement Age: The full retirement age (currently between 66 and 67, depending on birth year) could be gradually raised to reflect increasing life expectancy, thus reducing the number of years people collect benefits.
  • Modify the Cost-of-Living Adjustments (COLA): Adjusting the formula that determines annual benefit increases for inflation could help slow the rate at which benefits grow.
  • Means Testing: Benefits could be reduced or phased out for high-income beneficiaries.

Combination Approaches:

  • Balanced Measures: Some proposals suggest a mix of tax increases and benefit cuts to spread the impact more evenly across the population.
  • New Sources of Revenue: Ideas such as dedicating revenue from new taxes (e.g., on carbon emissions or financial transactions) to the Social Security Trust Fund have also been discussed.

Planning Ahead

Let's return to the scenario I described at the very beginning: we are on a ship going 20 miles per hour and 100 miles offshore. Under the current conditions, we will run aground in five hours. A competent crew would simply adjust the ship's speed or bearing to avert that disaster and would do so in a way that minimizes disruption to the passengers. The possible measures I made note of above are examples of some of these "course corrections" that could shore up the Social Security and Medicare programs for the foreseeable future. In this case, however, the crew is the United States Congress.

One year ago today, I wrote an article concerning the Debt Ceiling, another track off of the Financial Media's "Greatest Hits": . In that article I argued that the Debt Ceiling debate is not actually an economic problem, but a political one caused by inter- and intra-party dysfunction in Washington, and I believe that the problem of the depletion of the Social Security and Medicare Trust Funds that we have explored today is the same. Democrats may say that they want to increase revenue, while Republicans may say that they want to decrease spending, but Congress cannot solve this or other urgent problems if both sides remain dug into their positions.

We need our lawmakers to engage in informed negotiations and make the compromises necessary to ensure the sustainability of Social Security and Medicare, and we must hold them accountable to prioritizing the financial well-being of the American public.

At Acadium, we are often asked questions with the following idea at the core: if the Social Security program is at risk, what strategy or strategies should I implement to maximize my personal benefit? People often wonder if they should file for early benefits, for example. However, if one understands that the risk is benefit reduction rather than termination then it becomes clear that filing early is not a solution, and that the math still favors deferring Social Security income as long as possible.

Long-term planning should not be swayed by alarming headlines. Focus instead on controllable aspects of your financial plan, such as tax obligations and achieving lifestyle goals, rather than the fiscal state of Social Security. Prioritize not running out of money while living the lifestyle and having the impact you desire rather than timing your benefits. If you have questions about how to optimize your Social Security planning and how it ties into your personal financial picture, we are here.

Frank Hujsa, CFP®, CLU®
Partner, Acadium Financial Partners
Financial Adviser, RJFS

C 239.207.4392

27499 Riverview Center Boulevard, Suite 108
Bonita Springs, FL 34134

Any opinions are those of Frank Hujsa and are not necessarily those of Raymond James. Securities offered through Raymond James Financial Services, Inc. member FINRA/SIPC. Acadium Financial Partners is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc.

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