In a recent press release issued by the Social Security Board of Trustees, the projection for the depletion of the Combined Trust Funds has been brought forward by one year compared to the previous year's estimate. Now, the Combined Funds are anticipated to run out of funds by 2034, while the OASI Fund is expected to be depleted by 2033, an entire decade from the present. This news has created a significant impact on the retirement community. In this blog post, we will elucidate the implications of this press release. Furthermore, we will delve into an exploration of how the social security system operates and explore potential solutions to address this impending issue. The full Report can be accessed here.
So what does the Report say?
The annual Report of the Social Security Board of Trustees assesses the financial health of the Social Security Trust Funds. Here's an explanation of the key points:
- Social Security Trust Funds: Social Security in the United States operates through two central trust funds - the Old Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund. These funds are set up to ensure that there's enough money to pay out Social Security benefits to eligible individuals.
- Asset Reserves Depletion: The Report states that the combined asset reserves of both the OASI and DI Trust Funds are projected to be entirely depleted by the year 2034. This means that if no changes are made to the program, the funds will no longer have enough money to cover the benefits promised to beneficiaries.
- Year Earlier Than Projected: This year's Report shows that the depletion of these combined funds is expected to happen one year earlier than previously estimated. In the previous Report, it was projected to happen in 2035, but now it's projected to happen in 2034.
- 80 Percent of Benefits Payable: When the combined funds run out in 2034, the Report suggests that the Social Security program will still be able to pay about 80 percent of the promised benefits to eligible recipients. This is because some revenue continues to come into the system through payroll taxes and other sources. Still, more is needed to maintain the full benefits.
- OASI Trust Fund: The OASI Trust Fund, which primarily supports retirement and survivor benefits, is projected to be depleted in 2033. This is also one year earlier than previously estimated. At that point, the Report suggests that about 77 percent of the promised OASI benefits will still be payable.
- DI Trust Fund: In contrast, the Report does not project the depletion of the DI Trust Fund during the 75-year projection period. This means that, based on current projections, there should be enough funding to cover disability benefits through this period.
- The decline in Trust Fund Assets: In 2022, the combined assets of the Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) Trust Funds decreased by $22 billion. This resulted in a total reserve of $2.830 trillion for these funds. The decline in assets means that the funds have less money available to pay out Social Security benefits.
- Imbalance in 2023 and Beyond: The Report predicts that in 2023, the total annual cost of the Social Security program will be higher than its total annual income. This financial imbalance is expected to continue throughout the 75-year projection period. This imbalance has been an ongoing issue since 2021, and the program's costs have been exceeding its non-interest income since 2010. In essence, Social Security is currently paying out more in benefits than it is collecting in revenue.
- Depletion of Reserves by 2034: Unless Congress takes corrective action before 2034, the combined trust fund reserves are projected to be exhausted by that year. However, even if the reserves are depleted, there will still be enough income to cover approximately 80 percent of the scheduled Social Security benefits. This means that while full benefits may not be payable, there will still be some funds available to support beneficiaries.
- Income and Expenditures in 2022: In 2022, the combined OASI and DI Trust Funds received a total income of $1.222 trillion. This income includes contributions from net payroll taxes (the taxes paid by workers and employers), taxation of benefits, and interest earned on the trust fund assets. However, the total expenditures from these trust funds in 2022 amounted to $1.244 trillion. This means that Social Security paid out more in benefits and other expenses than it received in income for that year.
- Total Benefits Paid: Social Security disbursed a total of $1.232 trillion in benefits in 2022 to approximately 66 million beneficiaries. These benefits include retirement, survivor, and disability benefits provided to eligible individuals.
- Projected Actuarial Deficit: The Report indicates that the projected actuarial deficit over the 75-year long-range period is estimated to be 3.61 percent of taxable payroll. This means that, based on current projections, there is a gap between the program's expenses and its income, and it amounts to 3.61 percent of the total earnings subject to Social Security taxes. This deficit is slightly higher than the previous year's projection of 3.42 percent, indicating a worsening financial outlook.
- Covered Earnings and Payroll Taxes: In 2022, approximately 181 million people had earnings covered by Social Security, and they paid payroll taxes on these earnings. Payroll taxes are a primary source of revenue for the Social Security program.
- Administrative Costs: The administrative cost to operate the Social Security program in 2022 was only $6.7 billion, representing a small fraction (0.5 percent) of the total expenditures. This indicates that the cost of running the program itself is relatively low compared to the overall expenses associated with benefits and other obligations.
How Social Security Works:
Social Security in the U.S. is funded primarily through a special tax called the "payroll tax." It's 12.4% of your wages, but there's a limit on how much high earners pay.
This tax is shared between employees and employers, with each paying 6.2% of the employee's wages. If you're self-employed, you pay the complete 12.4%, but you can deduct half of it from your income for tax purposes.
The money from these taxes goes into the Social Security trust funds, which are like savings accounts for the program. Extra funds are invested in government debt.
Notably, the money you pay into Social Security goes into something other than a personal account just for you. It's used to pay current retirees or save for the program's future needs.
How the Money Is Used:
In 2022, 85 cents of every dollar in payroll tax goes to the trust fund that pays monthly benefits to current retirees and their families, including families of deceased workers. The remaining 15 cents goes to a fund that helps people with disabilities and their families.
Until recently, Social Security had more money saved than it needed to pay benefits.
However, things are changing. In the next decade, there will be fewer people working and paying into Social Security, while more people will be receiving benefits. This is because of a lower birth rate after the baby boom period from 1946 to 1964.
The latest estimates from Social Security trustees suggest that by 2033, the trust fund for retirement benefits will run out of money. At that point, the payroll taxes coming in will only cover about 77% of what's promised to eligible retirees.
This highlights the need to find solutions to ensure that Social Security can keep providing benefits to future retirees.
Why Does Social Security Matters?
Social Security is a super important program that nearly everyone supports, no matter their political beliefs. A survey found that 90% of Democrats, Republicans, and independents like it.
Originally, Social Security was meant to give retired folks extra money on top of their savings. But nowadays, lots of older people rely on it as their primary source of money after they stop working.
In fact, about half of all seniors depend on Social Security for at least half of their retirement cash, according to a group called the Center on Budget and Policy Priorities.
The Three-Legged Stool:
When we talk about retirement money, it's like a three-legged stool. One leg is Social Security, another is a pension plan (if you have one), and the third is your savings, like money you put in a 401(k) or IRA account.
But only some have a 401(k) plan. In fact, only about half of people who work in the private sector get access to one. That's where Social Security becomes super important.
Who Benefits Most:
An expert on retirement money, Alicia Munnell, says that the 401(k) system has been good for the top 40% of workers but not so much for the other 60%.
This means a big chunk of people don't have another reliable way to get money when they retire, except for Social Security.
So, it's really important not to cut down on Social Security benefits because it's a big part of how many Americans stay financially secure in retirement.
What is the solution to this insolvency problem of Social Security?
Addressing the financial concerns surrounding Social Security is a pressing issue, given its central role in the retirement security of millions of Americans. To fortify the program for the future, a range of solutions has been put forth, each aiming to strike a balance between preserving benefits and sustaining the program's fiscal health.
- Raising the Wage Cap: Currently, there's a limit on how much of your income is subject to Social Security taxes, which is around $160,000. Some experts suggest increasing this income cap so that people with higher incomes pay more into Social Security. This change would help make sure the Social Security fund stays healthy by spreading the tax burden more fairly. It means that higher-income folks would contribute more to support the system.
- Increasing the Payroll Tax Rate: Another option is to slightly raise the payroll tax rate, which means both employees and employers pay more of their wages into Social Security. This increase in the tax rate would bring in extra money to cover the program's financial problems. However, it is a burden on workers and businesses.
- Proposed Legislation by Senator Bernie Sanders: Senator Bernie Sanders put forward a bill to tackle Social Security's money issues. His plan has some significant changes. Sanders wants to give retirees an extra $2,400 each year in benefits. That's a big raise for people getting Social Security. His plan also suggests making high earners pay more by applying the payroll tax to incomes over $250,000. According to the Social Security Administration's analysis, these changes would keep the program running for 75 more years, which is a significant improvement.
The Importance of Planning Beyond Social Security
While Social Security remains a cornerstone of retirement income for many Americans, over-reliance on this government program can pose financial risks. Designed as a safety net, Social Security may only partially cover retirees' financial needs, particularly if future benefit reductions become a reality.
To bolster your retirement income, it's essential to engage in comprehensive retirement planning. This includes not only diligent saving and investing but also exploring a range of retirement accounts and investment options. Among these are 401(k) plans, Individual Retirement Accounts (IRAs), and the lesser-known yet valuable options of Opening Gold IRAs and Opening Silver IRAs.
401(k) plans, often offered by employers with matching contributions, can be a powerful tool in building your retirement nest egg. These contributions, matched by your employer, amplify the growth of your savings. Additionally, considering precious metals like gold and silver for your IRA can provide a hedge against economic uncertainties and inflation.
Incorporating wise investment strategies and starting your retirement savings journey early are vital pillars of a successful retirement plan. Furthermore, reading books on retirement planning can be an invaluable resource in gaining the knowledge and insights needed to make informed financial decisions. These books offer a wealth of information on topics such as investment strategies, tax planning, and estate planning, empowering you to navigate the complex terrain of retirement planning with confidence.
By diversifying your investments, exploring various retirement plans, and leveraging the knowledge from retirement planning books, you can fortify your financial future, mitigating potential challenges that Social Security alone may not address."
In conclusion, Social Security has played a vital role in providing retirement security to countless Americans throughout its history. Yet, as we face evolving demographics and financial hurdles, it becomes increasingly crucial for Congress to take decisive action to safeguard this essential program for future generations. However, we must also recognize the importance of personal responsibility in securing our financial futures. By proactively planning for retirement, making sound financial decisions, and seeking opportunities for saving and investing, each of us has the power to build a more stable and fulfilling retirement, ensuring peace of mind for ourselves and our loved ones. In this partnership between government support and individual initiative, we can work together to create a brighter retirement landscape for all.