Social Security is at a major tipping point. We're living longer and having fewer children than previous generations did. As a result, Social Security will start paying out more than it's taking in this year.
Social Security will soon begin to dip into its $2.9 trillion Old Age and Survivors Insurance Trust to pay its obligations. The latest projections from the Congressional Budget Office say the trust will be depleted by 2031.
Despite the scary picture those numbers paint, this isn't a ticking time bomb. Here are three reasons you can still count on Social Security benefits being around for you, even if you're decades away from retirement.
1. Payroll taxes can fund most obligations
Throughout its history, Social Security has collected more than it's paid out. That $2.9 trillion reserve is the product of all that extra money.
But Social Security is a pay-as-you-go program. It's funded with payroll taxes -- the 6.2% of your paycheck that's automatically withheld on the first $137,700 of your earnings that your employer matches. Workers will continue paying into Social Security as it depletes its reserve. If Social Security burned through all $2.9 trillion, payroll taxes alone could still fund 76% of its obligations.
Understandably, President Donald Trump's executive order this year to suspend the collection of payroll taxes through the remainder of the year has made some workers nervous about the future of their benefits. But unless Congress passes a law retroactively approving the holiday, workers will have to pay that money back in early 2021. In the unlikely event that Congress would approve the tax cut, it's almost certain that they'd use general funds to reimburse Social Security -- which is what happened when President Barack Obama worked with Congress to temporarily cut payroll taxes in the Great Recession's aftermath.
2. There are plenty of ways to fix it
Congress has multiple options for reducing the shortfall that would keep benefits intact for future generations. That said, depending on the option chosen, some workers would have to wait longer to collect or pay more in taxes. A few possible ways Congress could replenish Social Security coffers are:
- Raising the age when you can claim: Congress could raise the full retirement age (FRA), which is the age when you qualify for 100% of your benefits, or the minimum age for Social Security, which is 62. FRA was originally 65, but President Ronald Reagan signed legislation in 1983 that gradually increased FRA to 67 for anyone born in 1960 or later.
- Increasing payroll taxes: A Social Security trustees report from earlier this year said that immediately increasing payroll taxes by 3.14 percentage points could make up for the shortfall. Because employees and employers split payroll taxes, each would pay an additional 1.57 percentage points. Waiting until 2035 would require a 4.13 percentage-point increase, or 2.065 percentage points on both the employee and employer side.
- Eliminating the payroll tax cap: Taxing earnings above $137,700 could reduce the deficit. Democratic presidential challenger Joe Biden's Social Security plan calls for imposing payroll taxes on earnings above $400,000. Earnings between $137,700 and $400,000 would remain exempt.
3. Politicians know it's hugely popular
Increasing taxes or the age when workers can receive Social Security benefits may not be politically popular. But lawmakers know that cutting benefits would be political suicide.
Social Security enjoys widespread bipartisan support. A 2019 Pew Research Center study found that 74% of Americans don't believe benefits should be cut in any way. Moreover, two-thirds of Americans, including majorities of both Democrats and Republicans, say the current average monthly benefit of $1,503 is too low, according to an August 2020 survey by the AARP.
Seniors also rely heavily on Social Security. About 39% of Americans say they'll rely on Social Security more than any other income source in retirement, according to the AARP.
Politicians know that their constituents largely support Social Security and that many of them are either dependent on it or will be at some point. Failing to act could very well cost them reelection, and it's hard to believe they aren't acutely aware of that.
Can you really count on Social Security?
Remember: Even if Congress doesn't act over the next decade, Social Security can still fund 76% of the benefits it's promised from the payroll taxes it takes in. And it's highly likely that Congress will act before then.
So yes, your benefits are probably safe. Still, there's a huge danger in relying too much on Social Security for your retirement needs.
Social Security was never meant to be the sole source of income in retirement -- even though about 1-in-4 seniors depend on their benefits for at least 90% of their income. But Social Security was only designed to replace about 40% of pre-retirement income for the average earner.
You can expect benefits to be around when you retire, but it's still essential to save for retirement. Also keep in mind that the only way to fix Social Security is for people to pay more money into it. Don't be surprised if you have to work longer or pay more taxes to get those benefits you've earned.