Social Security’s future solvency is a regular discussion point when considering retirement planning issues. It is common for people to think the benefit will be reduced from what is shown on their statement. Yet, that position is often taken without good information.
Up until 2011, the Social Security system actually collected more revenues from FICA payments than it paid out and that has been generally true since the 1940s. Most of the Social Security benefits that people receive are simply a transfer with the collected FICA payments paid out to benefit recipients. When a surplus existed, it had been used to pay government operating expenses, and for seven decades, the government issued “special issue federal securities,” which are fancy IOUs that pay interest, to the Social Security trust fund.
In 2011, the program crossed that threshold where benefit payments slightly exceeded the amount collected. Why? Because the number of beneficiaries, compared to the number of workers, has steadily increased. In 1955, there were more than eight workers paying into Social Security for every beneficiary. By 2031, if current estimates are correct, that ratio will fall to just over two workers supporting every retired beneficiary.
When Social Security Administration actuaries crunch the numbers, they have to take into account the shifting demographics and then make estimates of fertility and immigration rates, longevity, labor force participation rates, the growth of real wages and the growth of the economy. After adding in the value of the government IOUs, they estimate that if nothing is done to fix the system, the trust fund IOUs will run out in the year 2033. At that time, only the FICA money collected from workers would be available to pay Social Security beneficiaries. In real terms, that means the beneficiaries would, in 2034, see their payments drop to 77% of what they were promised.
In other words, the money being transferred from current workers to beneficiaries through the FICA, assuming no course corrections between now and 2033, will be enough to pay retirees 77% of the benefits they were otherwise expecting. The government actuaries say that if nothing is done to fix the problem, this percentage will gradually decline to 72% by the year 2078. So the worst-case scenario is people will likely receive about 75% of the benefits that they would otherwise have expected to receive and not zero as many believe.
In the late 1970s and early 1980s, Social Security was also running deficits that were depleting the trust fund with “insolvency” looming in 1983. In response, President Reagan signed an amendment in 1983 pushing back the full retirement age from 65 to 67, phased in by birth year. Age 67 as full retirement age started for those born in 1960 and after. So when Reagan made the changes in 1983, someone born in 1960 was 23 years old and had more than 40 years to plan for the change.
What is most interesting and impressive is that actuarial calculations at the time suggested the 1983 reforms were anticipated to provide for another 50 years of full solvency. So this means the trust fund depletion projected for the early 2030s is right on track after 30 years.
Yes, Social Security will have to change to ensure solvency longer-term. It is my opinion that these changes are most likely going to come in the form of uncapping payroll taxes and further pushing back the full retirement age. With these likely changes, the ones who will be most disproportionately affected are younger, highly compensated workers and not those nearer retirement. If history is a guide, which it is reasonable to believe it will be so, there will be plenty of time for those affected to adjust.
Kevin Kroskey, CFP®, MBA is President of True Wealth Design, an independent investment advisory and financial planning firm that assists individuals and families with their overall wealth management, including retirement planning, tax planning and investment management needs.