According to a new report from the US Treasury Department, the Social Security Administration will be unable to pay full benefits starting in 2034, a year earlier than previously expected. Millions of Americans get a large chunk of their retirement income from Social Security. But will that be possible going forward?

What you should know about Social Security

Social Security is designed to provide retirement income for American workers who paid into the system. It is funded through a dedicated payroll tax called FICA. In 2021, every working America pays 6.2% their wages to the government on everything they earn up to $142,800. Employers match that amount for a total of 12.4% in contributions. 

For the last decade, Social Security’s cash flow has been negative, meaning that the agency has been paying out more than it is collecting. They have used the interest from their trust fund to cover the shortfall. Beginning in 2021, the interest from the trust fund will not be enough to cover the shortfall and they will have to begin drawing down the trust fund to help pay for benefits. 

The recent report projected that their trust fund will be depleted in 12 years. When that happens, under current law, benefits paid that year will be cut across the board by 25%. The chart below illustrates the current income vs costs projection from their recent report. 

Why is it running out?
This is a direct result of population aging. Americans are having fewer children and living longer which both contribute to an aging population. The 2030s will mark a turning point for demographics in the U.S. By 2035, there will be 78 million people 65 years and older compared to 76.7 million under the age of 18. The ratio of workers to beneficiaries is falling which is a one of the main reasons the Social Security is underfunded.  

Another reason for the shortfall is because how the trust fund is required to be invested. Unlike pension funds who can invest in stocks, bonds, real estate and others, the Social Security Trust Fund can only invest in U.S. Treasury Securities. Examples would be treasury bills, notes, and bonds that are backed by the full faith and credit of the U.S government.  The average interest rate on their investments for August of 2021 was 2.371%. 

Can this be fixed? 
This is not the first time changes have been made to ensure benefits were paid in full. Back in 1982, President Regan signed a deal to boost current contributions a little and slowly raise the full retirement age to 67. 

Congress and the President will most likely have to make changes again to continue paying benefits in full. Potential solutions would be higher payroll taxes, reduction of benefits, or an increase the full retirement age. Social Security is currently taxable on income up to $142,800. President Biden’s recent tax proposal included FICA (payroll taxes) on income more than $400,000 as well. This is one of multiple options that could help address the issue. 

Social Security has been paid on time since its inception in 1935. It’s impossible to predict exactly what congress will do. The important thing is to remember that Congress has taken actions in the past to save Social Security and will most likely do so again before reducing payments. 

What can you do next?
If Congress does not make any changes, they are expected to pay benefits in full until 2034 then reduce them by 25%. If you think this will happen you should review your income needs in retirement and how you would bridge the shortfall. 

I personally think Congress has plenty of options and will make the changes necessary to pay out benefits in full. I would not be concerned about receiving your full Social Security benefits if you are 50 or older. If you are younger, it may make sense to explore what you are saving today and what other sources of income you might need if benefits are changed. 

George Maroudas 
Twitter @ChicagoAdvisor 

Disclaimers and Sources:

To view your Social Security Benefits: Log in here 
2021 OASDI Trustees Report: Link here
Social Security chart from Yahoo Finance: Link here 
Social Security Report for Monthly on Investment Holdings: Link here 
For more information on Social Security check out my post “Social Security Guide

*There are two Social Security Trust funds the Old-Age and Survivors Insurance (OASI)Trust Fund pays retirement and survivors benefits, and the Disability Insurance (DI) Trust Fund pays disability benefits. The balance for the Trust funds at the end of 2020 was $2.8 trillion for OASI and $93.1 billion for DI.  

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Past performance is no guarantee of future results. 

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