With the hundreds of questions, I get asked per week this question is usually right behind the most asked question which is, “At what age should I take my Social Security benefits?”
The short answer is yes. But before you go tell all of your friends, I told you, so. I recommend you stick around. Because although Social Security is going broke, it will never be broke. It’s kind of like what I tell my kids. I’m getting old, but I will never be old. I’m sure so some of you out there can relate to this.
So how can I say social security is going broke, but it will never be broke. I can say this because the laws governing the program, Social Security is required by law to operate in the black, which means that before Social Security gets to a point that it’s run out of assets to fund the program, the government will have to step in and implement changes to keep this from happening.
For those of you who are history buffs, you may remember the government stepped in and fix the program once before. In 1975, Social Security started running at a deficit. It was believed that the program would stop being able to make timely benefit payments somewhere around July of 1983. For a period of years there the government worked to solve the problem with no success. Then in 1983, Ronald Reagan was finally able to get both parties together to come up with changes the program needed to support the financial stability of it for the foreseeable future. Now, what are some of these major changes? I want to share some of those with you today.
One of the biggest changes that was implemented in 1983 was to make a portion of Social Security taxable, up to 85% of social security for higher income taxpayers became taxable. It was the first-time benefits were subject to tax since the program was brought about in 1935. This is still a major bone of contention for many people, because they feel it is double taxation. But regardless of the emotions you have towards the validity of what was done. This one move currently provides about $36.5 billion annually to the program to help ensure current benefits are paid. Another major change that was made as they gradually increase the full retirement age benefits from age 66 to age 67. Anyone born after 1954 had their full retirement age increase beyond that age. This increases an annual two month increase for each year after 1954. You were born capping out at age 67. Which means if you’re born in 1955 your full retirement age is 66. And two months, if you’re born in 1956, full retirement age is 66, and four months, and so forth going up until you’re born in 1960 or later, which now would have your full retirement age at age 67. They also sped up the already scheduled Social Security payroll tax increase that took it from 6.7% to 7.65%. Starting in 1990, the government put in new federal employees into the social security program. There’ll be additional contributions going into the program, and they delayed the cost of living expense for 1983 from July to December.
Currently, this annual increase now being done in January of each year.
So now you know, this isn’t our first rodeo regarding the financial stability of Social Security. Where are we now? If you were to look at the financial statements of the social security trust fund as of December 2019, you would probably be surprised at how secure the program looks on paper.
As of December 2019, the program had a fund balance of almost $2.9 trillion, and an annual surplus of right around $2.5 billion. This all sounds pretty good, especially when you compare it to the federal government debt of almost $27 trillion. And an annual deficit that is generally in excess of a trillion dollars, and this year will be somewhere north of $5 trillion. But as good as the program looks on paper, we still have a major problem facing us over the next decade.
And that problem is the baby boomers. We have around 10,000 retirees a day coming on to the program, and only about 6000 retirees a day leaving the program, which means that the cost of running the program is increasing on a daily basis. And the full weight of these additional people is going to cause the program to run out of assets somewhere between 2033 and 2035. Now that being said, if the government were to allow the program to spin down all the assets, it doesn’t mean there isn’t still an income stream that can be used to pay future benefits. It just means that based upon current benefits, retirees would only be able to get about 80% of what they’re being paid. But this is not going to happen either. Because remember that law we talked about before, that requires the government to fix the program before it runs out of money. This law will force politicians to take action.
Knowing the government has to take action to fix social security. I will spend the rest of the show talking about possible solutions that can be taken to make social security financially sustainable and the foreseeable future.
The first and easiest of the solutions I’ve seen would be for the government to simply raise the amount of taxes employees and employers are contributing into the program. Currently, each party is paying 6.2% for a total contribution amount of 12.4%. According to Larry Kotlikoff, a professor at Boston University, who is one of the top Economists on Social Security. He says that to fix the program indefinitely all the government would have to do is increase the amount paid from 12.4% to 17%. And the program could continue to operate as it currently does forever. Now I’m by no means saying this is the best solution. But it is the easiest solution because of the perceived small amount of the increase. Each party would only have to increase their cost by 2.3% in order to create a permanent fix, and they would have to be no further changes to the way the program currently operates.
Another option that is often discussed by people, especially since we’re living much longer than people were when the program was established in 1935, would be to move full retirement age from between age 66 and 67 to age 70. People are proponents of this strategy use longevity as the main reason the government should make this change. When the program was established back in 1935, life expectancy was only age 62. And you couldn’t receive benefits until age 65. Well, today life expectancy is between age 78 and 79, which means that the program still ran as it did when it was established, you wouldn’t be able to get benefits until around age 81 or 82. But because of changes to the program, we can get full retirement benefits somewhere between age 66 and 67. Therefore, to the group of people who are in support of this change, it only makes sense that people should have to wait longer to get full benefits than they currently do. The biggest problem I see with this proposed fix is it although many people are living longer, they’re not necessarily healthier. Which means many people are relying on social security at an early age because they can’t work, and they have to have the money.
Another option that is out there is to make all W2 earnings subject to the Social Security tax. Currently, you’re only required to contribute to social security on income up to $137,700. Those who are for doing this change, claim it is a way to solve the problem by putting a higher tax on those who are best in a position to pay the tax. Those opposed realize the pool of people making W2 wages over $137,700 is so small that by increasing the limit on Social Security taxable wages is only going to be putting a small band aid on the overall program.
Option number four is to change the program into a welfare program, which means that you would have to prove your other income was below a certain level to be able to qualify for the benefits. This is the one I dislike the most, because I think it disrupts the whole stability of the program. It’s my belief social security has worked so well for so long, because it is available to everyone who has contributed into the program. Therefore, it prevents more people from trying to circumvent contributing into the program.
Option number five is to decrease the delayed retirement credits. Currently, the law allows retirees to get an 8% annual increase in their benefits for each year beyond full retirement age that they delay their benefits up until age 70. This idea is often promoted by the same group of people who want to move full retirement age from 67 to age 70. This option is not necessarily a bad option, because only about 4% of people end up waiting until age 70 to take their benefits anyway, and they are generally the wealthiest segment of the population. But because the number of people or weight is so low, it also means that the benefit to the program of making this change is also going to be very low.
Option six is to delay eligibility from 62 to 64. On the surface, this seems to not be such a bad idea. But just like the last option, would end up helping the wealthiest segment of the population. This change would end up hurting the poorest segment of the population, because 40% of retirees now use social security as their only source of retirement income. Therefore, most of them are having to take benefits as soon as they possibly can, which for most people is going to be at age 62.
Option number seven is to reduce the family benefits. The program is originally structured on a foundation of traditional family values, where one spouse would stay home and raise the children and the other spouse would go to work every day. As a result, many family members can get benefits off of a worker record without having ever contributed into the program. The program currently allows spouses some ex-spouses, some children and some parents to benefit from a worker’s record. Those promoting this particular change belief so security should be a standalone program that only provides benefits to the individual who has contributed to the program.
The last option I’ll cover today is the option to reduce annual COLA increases. To me this has been one of the greatest benefits of the program. Inflation is real and it can destroy a well-planned out retirement because of longevity. If you live 24 years into retirement and inflation is 3% per year, at the end of the 24 years, your buying power will have been cut in half. Which means that if you have $2,000 of monthly income, when you start, it will be like you only add $1,000 worth of income at the end of the 24 years. Because so many retirees rely on social security as their main source of retirement income. This is a change that would hurt the poor segment of the population once again. Prosperity Nation, I don’t know which of the changes I’ve talked about today, the government will choose to implement to solve the financial issues Social Security will have in the future, but they will choose one of them or a combination of them not because they want to, but because they have to in order to stabilize the program. Hopefully now you have a better understanding of my comment from the start of the show where I said, “Social Security is going broke, but it would never be broke”. It’s my belief that social security will continue to be a critical part of a well-planned out retirement and that we can count on it to be there for decades to come.
If you have questions about your own social security or if you’d like to have an analysis done to see what you can do to maximize your benefits, fill out the contact form.