Will Social Security be there for me?

Will Social Security still be there when I retire?

The short answer is yes, but depending on when you retire you may only get three-fourths of the benefits you’re entitled to, unless serious action is taken by the government in the next two decades.

This video explains Social Security’s funding issues.

As mentioned earlier, Social Security is a pay-as-you-go system, so that funds coming into the program are used to pay present benefits. The majority of income is from Social Security payroll deductions, the 6.2% that most workers pay into the system each month. Over 62 million people receive Social Security benefits, or nearly 20% of the U.S. population, including 90% of those age 65 or older. Therefore there is a delicate balance between money coming in to Social Security and money going out.

The incoming funds go in the Social Security trust fund, and the benefits are paid out of that fund. By law, if there is money remaining after present obligations are paid, the surplus is invested in a special class of U.S. government bonds, and the government uses the money to fund other programs. Therefore, the Social Security trust fund does not contain any money, just government bonds. The interest from these bonds is another source of income for Social Security.

Social Security has been rescued before …

In the early 1980s, Social Security was on the brink of not being able to meet its obligations. Congress amended the Social Security program to shore it up. It increased payroll withholdings and also increased the full retirement age for some retirees from 65 to 67. Combined with the booming economy of the late 1980s and 1990s, which resulted in high employment and more payroll withholdings, the trust fund had a surplus, which by 2010 stood at over $2.5 trillion.

Many people have the impression that Congress “raided” the Social Security trust fund to pay for other programs. In fact, the law is written such that the trust fund cannot hold the excess cash but must use it to buy Treasury bonds, and the government must use the money to finance other programs.

… and will need to be rescued again soon

Starting in 2010, the program began paying out more in benefits than it was taking in. The deficit was $49 billion in 2010, $55 billion ins 2012, and is projected to average $75 billion each year until 2018, then rise rapidly from there.

There are several reasons for the shortfall. The Baby Boomer generation, Americans born in the decades after World War II, are now retiring and beginning to receive benefits. People are living longer than before, so the program pays out benefits longer than it did in the past. Also, people now have fewer children than earlier generations, so there are fewer workers to fund the program. Additionally, Congress introduced a Social Security payroll tax holiday into 2011 and 2012, temporarily reducing the deduction for most employees from 6.2% to 4.2%.

Social Security cannot pay full benefits after 2033

The trust fund is currently receiving repayments and interest from the bonds it issued in the past, but that will end in 2033. At that time, benefits paid out will exceed Social Security deductions coming in by about 23 percent. To close this gap, either taxes will need to be increased by about one-third, benefits need to be reduced by about one-fourth, or a combination of more deductions and and lower benefits.

In 2013, the Social Security Office of the Chief Actuary’s annual report stated that,

“Neither Medicare nor Social Security can sustain projected long-run programs in full under currently scheduled financing, and legislative changes are necessary to avoid disruptive consequences for beneficiaries and taxpayers.”

The report also stated,

“Both programs [Medicare and Social Security] will experience cost growth substantially in excess of GDP growth through the mid-2030s due to rapid population aging caused by the large baby-boom generation entering retirement and lower-birth-rate generations entering employment…”

The Social Security deficit is also having an impact on the overall federal government’s finances. When the program was running a surplus, the government was able to use the funds to supplement other programs. Now the government is having to borrow from the public and other countries to make the interest payments on the Social Security bonds. Social Security and Medicare already accounted for 38% of the federal budget in 2012. That percentage is expected to grow in the coming years so Congress will have to issue more debt.

On the other hand, we do need to put the problem in perspective. After 2030, taxes paid into the system are projected to be about 4.7 percent of GDP, but the benefits paid will be about 6.1 percent of GDP. The difference is about 1.5 percent of GDP. So the government needs to make changes amounting to about 1.5 percent of all the goods and services produced by our country. This isn’t an insurmountable problem, and it’s not one that lawmakers haven’t faced down before. And the sooner our leaders get around to taking on the issue, the less burdensome the changes will be.