Social Security is about to hit a milestone that may impact your benefits, especially if you are still a few decades away from retirement.
According to estimates from the Social Security Board of Trustees’ 2017 report, 2022 will mark the first time in forty years that SS will pay out more than it collects in revenue. What’s more, this shortfall is expected to continue for some years to come.
The pot that holds the money for SS benefits is called the Old-Age, Survivors, and Disability Insurance Trust (OASDI). For so many years, the OASDI has generated more income than it has disbursed, allowing asset reserves (which are invested in special-issue bonds) to grow to nearly $2.9 trillion.
Here’s a breakdown of the deficit forecast for the OASDI from the Trustees’ report:
– 2022: $18.2 billion decrease
– 2023: $46.4 billion decrease
– 2024: $75.7 billion decrease
– 2025: $108.9 billion decrease
– 2026: $143.8 billion decrease
Add these numbers, and you see that SS’s reserves stand to be reduced by almost $400 billion in just five years. The trust fund ratio (the percentage of asset reserves in relation to scheduled benefits) will tumble accordingly, from 298% in 2017 to only 165% in 2026. And the worst news: The Trustees’ report also predicted that the reserve will dry up by 2034.
What’s going on? Good question.
The answer is layered. One of the component problems is that baby boomers are retiring – and there are a lot of them. Of course, we can’t fault anyone for when they were born, and these folks paid into SS during their working years. But, as they retire, the boomers will create a significant shift in the worker-to-SS-beneficiary ratio in America, meaning there just aren’t enough new or current workers to support the drove of people who will enter retirement in the coming years.
Another factor is our increased longevity. Back in 1935 when SS was signed into law, people weren’t living as long as they are today. The benefits typically supported retired workers for a handful of years. But since 1960, our average life expectancy in the US has risen by nine years. According to the Centers for Disease Control and Prevention (CDC), an average 65-year-old in 1960 would be lucky to make it to 80. Today, the average 65-year-old man can expect to live at least another 19 years, and the average 65-year-old woman can expect at least another 21.5 years. So, we’re living longer, healthier lives, which is good for us, but stressful for the OASDI.
Some observers are also pointing fingers at the Federal Reserve, arguing that had they not kept interest rates at record lows for seven years, the special bonds the OASDI’s reserve holds could have increased more in value and perhaps kept pace with demographic realities.
So, what does all this mean for you? While it’s not good news at all, it’s also not as calamitous as it may seem.
First, even if the Trustees’ report is accurate and the SS asset reserve runs out by 2034, this doesn’t mean the program will bankrupt.
Social Security is funded in three ways: from the 12.4 % income tax on earned income from $0.01 to $128,400 (as of 2018); from interest income earned on its assets reserves; and from the taxation of SS benefits themselves.
The last two categories are small change; in 2016, tax on benefits brought in $32.8 billion, while interest income generated another $88.4 billion. But, payroll tax garnered a juicy $836.2 billion, or 87.3% of the total collected that year. So, it appears that as long as we keep the payroll tax as the primary funding source for SS, and as long as Americans keep working, the program will continue collecting money to distribute to beneficiaries.
Still, the potential for a benefit cut to current or future benefits exists. If SS’s reserves begin to shrink as projected in 2022, this would be a loud-and-clear signal that the current payout scheme isn’t sustainable. The Trustees report suggested that across-the-board cuts of up to 23% may be required to sustain payouts through 2091.
Let this be a call to action for your retirement plan. If you ask me, it’s better to take affirmative action than to wait and see what comes out in the wash. While there’s no harm in counting on SS to provide you with supplemental income during your post-work years, there is a risk if you rely on it to fully fund your retirement. But with prudent planning, you can provide enough of a nest egg for yourself and your spouse to make sure those benefit checks aren’t the only income you’re getting in your mailbox each month.