It can happen to anyone. You turn 55, realize you have saved little for retirement and begin to panic because you’ve heard social security is going bust. You’re not alone. In fact, 50% of all adults have doubts that social security will be available by the time they file for benefits. Another 24% are confident that it will not be around.
Meanwhile, the average American has saved only about $85,000 for retirement and a whopping 30% of baby boomers (now aged 54-72) have saved less than $25,000. More than 75% of Americans are very concerned about an affordable retirement and two-thirds believe they will outlive their savings during retirement.
Paltry nest eggs make social security benefits critically important for retirees, yet the social security board of trustees projects the $2.9 trillion trust fund will be depleted by 2034, forcing benefits to be cut to only 79% of normal. That’s especially bad news for the roughly 33% of all recipients whose benefits comprise more than 90% of their income. Is it time to panic? Maybe not, but retirees do need to prepare.
So, let’s take a look at the social security system and also examine how retirees can improve their financial health.
Social Security Begins Going Broke In 2018
Social Security’s solvency is determined by what it takes in and what it pays out.
The money to pay Social Security benefits comes from two sources:
Annual revenue, which is generated from:
A payroll tax of 12.4% on earned income up to $128,400, with the employer paying 6.2% and the employee paying 6.2%. Payroll taxes generate 87% of all the revenue.
Interest on the trust fund contributes about 9% of revenue.
Taxation of social security benefits from those collecting makes up the remaining 4%.
The Social Security Trust Fund, whose balance stood at $2.89 trillion at the end of 2017.
2018-2034 are estimates
The Social Security Administration took in $997 billion in 2017 and paid out $952 billion in benefits to 62 million recipients, thus eking out a small surplus of $44 billion. With the exception of the recession-impacted years of 1975-1981, social security has generated a surplus each year since 1965.
2018-2034 are estimates
2018 marks an important turning point in social security’s bottom line. For the first time since 1981, social security is projected to sustain a small deficit in 2018. Moreover, the board of trustees projects increasing annual deficits each year going forward.
Social Security’s $2.9 Trillion Trust Fund Will Be Depleted by about 2034
Annual deficits force social security to dip into the trust fund to offset the shortfall so that recipients get 100% of their benefits. Steadily rising deficits will mean continuing annual withdrawals from the trust fund.
2018-2034 are estimates
Assuming no changes in the current collection and disbursement laws and assuming baseline economic assumptions, the board of trustees’ 2018 annual report predicts that steadily increasing annual deficits will bleed the trust fund dry by 2034. This estimate is one year earlier than the board predicted last year, and a more conservative economic scenario has the fund being depleted by 2030.
When the fund is depleted in 2034, payroll tax income and income tax on recipients’ benefits (the only two remaining streams of revenue) will only be able to pay about 79% of benefits. Cuts of this magnitude will surely hurt those retirees with minimal savings.
Technically, even after the trust fund is depleted in 2034, social security will not go completely bankrupt as there will always be some amount of payroll tax revenue. However, the percentage paid out in benefits will likely continue to decrease, resulting in increased hardships for those who depend on those checks to live. Again, this is a particularly dire situation for the 33% of all recipients whose benefits comprise more than 90% of their income.
The Math Does Not Work Anymore
Social security was humming along with surpluses for many years so what’s causing the annual deficits in 2018 and beyond? Quite simply, it’s because the math does not work anymore:
People are living longer. The life expectancy was 69.6 years in 1955 but had increased to 78.6 years by 2016. Living longer causes Social Security to pay out more in total benefits than originally expected.
Exacerbating this living-longer trend is the roughly 74 million baby boomers (born 1946-1964) who are rapidly moving into their 60s and beginning to collect social security. Longer life expectancies and maturing baby boomers are responsible for increasing the growth rate in total social security recipients to 2% annually over the past 10 years compared to a 1.4% annual growth rate in the prior 10-year period. And it’s not over. Since the oldest of this generation turned 62 in 2008 (and thus became eligible for benefits), we are only about half way through the impact of this massive population bulge.
Fewer and fewer people are working to cover an ever-growing number of recipients. The ratio of the number of people working (and paying SS taxes to fund benefit payments) to the number of people receiving benefits has declined from 3.7 in 1970, to 3.4 in 1990, to 2.8 today.
Making Social Security Solvent
There are really only two alternatives to make social security solvent and both will be painful – raise revenue and/or cut/delay benefits.
Revenue can be increased by:
Increasing the earnings cap (currently $128,400) at a faster rate than the 2.9% annual increase it has averaged since 2000. Maybe even eliminating the earnings cap for high earners.
Increase the payroll tax from the current 12.4% rate (combined employer and employee).
Tax other sources of income, like investment income, as well as other pretax deductions such as 401K contributions.
Redirect taxes collected from other sources to help fund social security.
The level of outflows (benefits paid) could be reduced/delayed by:
Raising the retirement age.
Cutting benefits.
Stop paying Cost of Living Adjustments, or change the way it is calculated.
Stop paying SS to those who do not need it.
If Washington had done something 20+ years ago when analysts began warning about the Social Security’s insolvency, we’d likely not be in this situation. Minor adjustments to both increase revenue and trim benefits would have been relatively painless on everyone and could have fixed Social Security’s insolvency. But Washington did little, and now that the depletion date is much closer, changes to revenue/expenses are likely to be more dramatic and to cause far more pain.
So, Is Social Security Going Broke?
So, is social security going broke? The answer is yes because the trust fund is projected to be depleted by 2034. However, Social Security will continue to pay a percentage of social security benefits. Regardless, it’s not a pretty picture unless Washington does something, and soon. Even if so, the pain may be considerable.
When will Washington address this issue? Someday, hopefully. Retirees, however, need to address the looming social security shortfalls yesterday. It’s vital for people to start taking their financial future into their own hands. It doesn’t matter if you’re 60 and approaching retirement, or a young millennial just entering the workforce, you need to start planning now.
You can get started right now by using our retirement calculator to ensure your golden years truly are golden.
Social Security at a glance
- Social Security was established in 1935.
- Ernest Ackerman, the earliest known recipient for social security, retired one day after the program began. A nickel was withheld from his check to cover the payroll tax and upon retiring, he received a lump sum check for 17 cents (benefits were paid in one lump sum until 1940).
- About 62.5 million people currently receive social security benefits.
- About 20% of all people in the US receive benefits.
- 84% of all people age 65 and older receive Social Security.
- About 25% of all US households receive benefits.
- The average retiree receives $1,413 in monthly benefits.
- Social Security comprises more than 90% of the total income for about a third of recipients.
- SS benefits typically replace about one-third of pre-retirement earnings.
- Once turning 62, your SS income to be received at any age will begin rising at the rate of inflation (CPI-W), regardless of whether you are collecting.
Source: Social Security Administration