What’s more important, the amount you’ll receive from Social Security, or if it will be around when it comes time to collect it? The answer is obvious, which is why so many are concerned with the question.
Starting from the top, and speaking only to retirement benefits, there’s a trust that houses funds from years when the contributions made by workers exceeds those paid out to retirees, and it’s known as the Old Age and Survivors Insurance Trust.
The trust assets are used to fulfill shortfalls in years when inflows are less than outflows. Since 1957, that’s only been the case 12 times…with seven of those years occurring during the mid-seventies up unto the early eighties.
Although 2018 was positive, it was nearly a breakeven, and statistician and actuaries are predicting several years of negative activity leading up to an exhaust date of 2034 – which begs the question, “Will social security benefits be around when I retire?”
If we take the math whizz’s estimations for face value, “what will happen when the bucket runs dry come 2034?”
First off, Social security is a pay-as-you-go system – What does that mean? It means the social security tax you pay every time you collect a check, is paid to someone collecting their benefits, and so you are helping another just as they helped someone before them…and the cycle continues…
But you’re not the only one paying into the system. There are over ~150,000,000 Americans paying roughly ~60,000,000 retirees benefits each year…but wait, if there’s more than double paying than collecting, how will the system fail?
The system won’t just up and fail, that’s a misconception…the same actuaries and statisticians state income payments are enough to cover 77% of outgoing benefits INDEFINITELY.
So what will they do to make whole on the shortfall, that 23%…reduce current benefits? That would be a dramatic change for current retirees. Imagine your payday comes and you’re only paid 75% of your earnings. This has the potential of forcing millions of middle class retirees into poverty, and those living off social security alone, even further into financial devastation.
On the other hand, you could reduce benefits for future retirees, provided enough time be granted so they could make up the difference by saving more.
There are multiple ways to reduce benefits themselves. They could reduce the benefit brackets your average indexed monthly earnings are applied to, they could decrease the rate they pay for each of those brackets, they could change the date your brackets are set at which is currently age 62, or they could change the date your index factor is calculated reducing your inflation increases, or a combination of these factors.
The second option, is to increase taxes, of which there are two ways. Increasing the current tax rate of 6.2% to 8.05%, wouldn’t please the workforce, but it would be enough to fill the gap.
The second, and less impactful method on the majority, would be to increase the annual taxable income ceiling, forcing high income earners to cough up more dime.
Because it’s difficult to calculate how many individuals make over the annual maximum, and what their income is, we can only assume moving it higher would aid the deficit.
Lastly, they could increase the minimum age to file for benefits. Moving the current minimum age from 62 to 63, would keep current workers working, providing an additional year of payments to current retirees.
The number of variables involved to calculate the new age minimum required to cover the shortfall make it difficult to come up with an estimation, but it wouldn’t be the first time the administration used a similar method. In the late 1930s and mid 1950s, the administration increased the age benefits are based on, known as the full retirement age. The increment took place over 5 year segments with 2 month increases for each year.
In the end, an exhaust date of 2034 provides another 14 years before any of these options come to term, permitting enough time for current retirees, and those retiring in the next 5 years, to receive 100% of their benefit for at least half of their retirement.
But what about the young workers?
It would place a 30-year old into their mid 40’s, and roughly 20 years from retirement, so the question becomes, “can the system hold up during the 20-years it takes to get from its exhaust date to a retirement age of 65, and an additional 20 years through retirement?”
And our answer, is that the system DOES grant a lot of flexibility, but in order for you to receive a benefit, you should bank on paying more tax, working longer, while receiving a lower benefit than today’s receivers, unless Congress or the American people can figure a way to generate a greater GDP or spend less.