Will social security run out?
You may see the alarming note on your latest social security statement saying that projected levels are not enough to sustain payouts after 2035. Combined with the news of massive budget deficits, a rapidly slowing economy, a shrinking labor force, and rising health and living costs make up a perfect storm where benefits will need to be cut during the time when it's most needed. However, Congress knows that social security is the most popular social benefit sustaining more than half of retirees nationally, there is motivation to keep this program lasting.
The Social Security office warns of a 13% cut to benefits by 2037 as there are only 76% of funds left to cover all benefits. Alternatively, a payroll tax increase from 12.4% to 14.4% would be needed in order to sustain payouts for the next 75 years^1. The $2.5t trust fund will fare even less as the pandemic eliminated millions of jobs that were paying into the trust; many of these jobs are not expected to return.
This was not the first time that the trust faced an alarming shortfall. In 1983, President Reagan signed a payroll tax hike to raise $2.3t into the trust. The controversy is that these funds were used for anything but Social Security benefits ^2. Nevertheless, the bill was passed to tax 50% of benefits if showing other income over $25,000/$32,000 (single/married) and it extended the retirement age. Back then, Congress knew of the decade long annual net shortfall and waited until the very last minute before passing reforms^3.
A 2019 bill from Congressman Pascrell, “Social Security 2100,” would shore up the deficit by raising employee tax rates slightly and more importantly, increase the threshold on income subject to Social Security tax from $132,900 to $400,000.^4 Currently the bill is held up by Republicans; it’s likely to make its way to a full vote if Democrats take back control of the Senate.
Although there’s every reason to be alarmed about the sustainability of social security benefits, it’s likely not to face any major issues. The first reason is that interest rates are ultra-low and the U.S. can borrow at these low rates to cover any deficit of any program. Second, there are discussions from democrats about taxing capital gains for Social Security and otherwise doing whatever is necessary to keep the program lasting. Since 1934, social security has been the most important social benefit for Americans and Congress knows that its continued dependence is unparalleled.
Future generations may face their own challenges. Lower birth rates, fewer jobs, and declining pay make for a serious case that Social Security won’t be a primary source of income for future retirees. For younger people, it's even more important to begin saving and investing now, in order to supplement any gaps in projected Social Security benefits.
At Eureka Wealth Management, I’ll help you review retirement cash flow and diversify your income so that you’re not completely relying on government benefits, when possible. I also do investment management, insurance, and tax strategies. Call for a free initial consultation at (760) 537-0791 or online at eurekawealthmanagement.com.
Sources:
^3 https://www.fool.com/retirement/2018/07/09/the-1-thing-nearly-everyone-forgets-about-reagans.aspx