By LouAnn Schulfer, AWMA®, AIF®
Accredited Wealth Management AdvisorSM
Accredited Investment Fiduciary®
A question I often hear is “Will Social Security be there when I retire?” The answer is yes. While I cannot tell you exactly what it will look like years down the road, I can give you a high-level perspective in this short article of how it works. Make no mistake, the program needs some sort of reform. The last seven Trustees Reports, available at https://www.ssa.gov/oact/TR/index.html, have warned us that Social Security’s trust funds are projected to become depleted between 2033 – 2034 if legislative change is not enacted. It’s up to congress to figure out what that legislative change should be. You can view changes that have been proposed so far at https://www.ssa.gov/oact/solvency/index.html.
Many believe there is a pot of social security money that pays monthly benefits out, it’s been “robbed” by politicians taking cash from the trust fund and spending it elsewhere, and once it’s broke, the program is done. Fortunately, it’s quite different from that.
The income we earn is taxed. In 2018, employees pay 6.2% of their first $128,400 of wages, salaries, etc., in social security tax. Employers match that, paying an additional 6.2%, for a total of 12.4% on that $128.400 wage base. For those of us who are self-employed, we pay the whole 12.4%. That money, collected as a tax, is sent to an office of the federal government where it is deposited into designated trust funds. The trust funds are managed by the United States Treasury Department, who provides the accounting services for the social security program and manages the accumulated assets (in the trust funds). Just as efficiently as the money comes in, it goes out in the form of payments to beneficiaries who are retired, disabled or widowed. Accumulated funds are invested in “special issues” of the United States Treasury. These special issues are only available to the trust funds, and by law, must guarantee both principal and interest from our federal government. Neither congress nor any politician can take money from social security’s trust funds to spend elsewhere. Trust fund money is invested in the special issue bonds, which in turn are paid back when the special issue bond is redeemed, much like if you or I were to purchase a bond as an investment and later cash that bond in to use the principal and accumulated interest.
In 2016, approximately 90% of what was paid to recipients as benefits came from taxes that were collected and paid into the trust funds. 9.2% of what was paid out came from interest earned on the bonds in the trust funds. [i] If benefit payments (money going out) exceed tax collections and interest earned (money coming in), then principal from the trust funds may be used to fund the gap. This is much the same as if your personal expenses exceeded your income, you’d need to dip into your savings. This brings us to 2018, where social security begins to use its trust fund reserves to help pay benefits[ii]. Thus, if this continues and nothing is done, and if the trustee’s reports accurately predict the depletion of the trust funds around 2033, it is estimated that about three-quarters of scheduled benefits could continue to be paid each year[iii]. This means that the money coming in through taxation after 2033 would pay out about 75% of what has been projected to be paid out as benefits.
$2,158 / mo ($25,896/year) at age 62
$2,589 / mo ($31,068/year) at age 65
$3,698 / mo ($44,376/year) at age 70
A couple both receiving max benefit at age 65 would collect $63,136, while a couple both earning the max benefit at 70 would take home $88,752. [iv] The average benefit paid to retired workers in 2018 is $1,404 per month.[v]
Don’t believe the scare tactics or hype that social security won’t be there in the future. Sensationalism sells. When you receive a solicitation, seminar invitation in the mail or catch a headline in the news, note the source and ask yourself what their motive may be. Yes, the program needs reform. The last major reform was in 1983[vi]. But to say that social security is going away is extreme.
Why am I confident that social security will survive? It is backed by the full faith, credit and taxing authority of the United States government. As long as there is an ability to tax and people to work, the program can survive.