The Surprising Truth About the Future of Social Security

Many of us have heard the myth: Social Security is rapidly running out of money, and there’s a fair chance it won’t exist when millennials retire — or even as soon as 2035. Here, we’ll review why that isn’t the case and why there is at least some reason for optimism surrounding the future of the Social Security benefit program.

Understanding Social Security

Social Security — in the context of retirement planning — typically refers to the monthly benefit that seniors receive upon calling it quits. When you file your claim for retirement benefits, you receive a monthly check for the rest of your life, adjusted annually for inflation. (On the subject, retirees collecting benefits in 2023 can expect an 8.7% increase in benefits, the largest rise since the early 1980s.)

In reality, the Social Security Administration, or SSA, administers two programs: the Old Age and Survivors Insurance program, and the Disability Insurance (DI) program (collectively called the OASDI programs). When retirees say they’re collecting Social Security, they mean to say they’re receiving retirement insurance benefits from the Old-Age and Survivors program.

The DI program, on the other hand, serves disabled workers and their families; this pool of money is entirely separate from the one that serves retirees. Note that you cannot collect from both programs at the same time.

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The concerns around Social Security

Both Social Security programs require inflows to meet their expected costs. Inflows come in the form of payroll tax, which is deducted from workers’ paychecks at a rate of 6.2% of earnings up to a maximum of $147,000 in 2022 ($160,200 in 2023).

Perhaps unfortunately, the cost of the Old-Age and Survivors Insurance (OASI) program will exceed total inflows in 2022. This means that the program will need to dip into its trust fund reserves to meet current claims for benefits. If the program continues taking from its reserves to meet projected benefit needs (exacerbated by increasing costs and an avalanche of new retirees), the OASI Trust Fund will run out in 2034.

Should this happen, the OASI program would still be able to pay out 77% of projected benefits just based on expected annual inflows. Fortunately, the DI Trust reserves are not expected to run out by the end of the century, which provides some comfort to families impacted by disabling health conditions.

Still, there is definitely some concern that the OASI program will fail to meet the needs of aspiring retirees. The question is not so much about whether Social Security will exist at all, but more about the Administration’s ability to pay full benefits upon claim receipts. Perhaps even more unsettling is that the longer Congress waits to act on the gap, the more drastic a step will be needed to bridge the difference down the line.

Some reasons for optimism

Again, the OASI program isn’t going extinct, but it is running low on trust fund reserves relative to the continued (and increasing) cost of the program. This means there will be at least some benefit to be had, even if — in a suboptimal scenario — benefits amounted only to 77% of what’s due.

Second, the DI Trust is healthy, meaning that disabled workers will be able to rely on Social Security disability payments to cover their basic spending needs.

Finally, it’s no secret that Social Security faces long-run solvency issues with regard to paying 100% of benefits for the next century. This is at the forefront of legislative discussion, and there is at least some probability that we’ll see a payroll tax increase to secure the future of the program. In other words, this isn’t a subject that’s going away any time soon.

Don’t count Social Security out

The chances of Social Security going away entirely are probably quite low. A much more likely scenario could be that retirees see a reduction in benefits starting in 2035. But there isn’t any way to know for sure until we see some legislative action around the program.

For financial planning purposes, you might consider projecting income from Social Security at three-fourths of estimated numbers to be extra conservative. That will help you plan for the worst while you can still hope for the better outcome of seeing action in Washington to ensure full benefits throughout your retirement.

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