Social Security is a vital component of financial security in retirement for millions of Americans, but there are many reports of Social Security being on a path to bankruptcy. While it's true that the system won't be solvent forever if things don't change, the reality is a little more complicated than many people realize. Here's what you need to know about the current state of Social Security, and what could be done to fix it.
Social Security is a necessary part of Americans' retirement income
The first two stats show just how important Social Security is. As of the latest available data release, 39.5 million retired Americans were receiving Social Security benefits, and 64% of these people rely on Social Security for more than half of their incomes in retirement. This is a total of more than 25 million people who depend on Social Security for the majority of their post-retirement incomes.
Even for those who have other significant sources of retirement income, Social Security is an important part of retirement financial planning for most people. After all, in what's the most important statistic for the program's recipients, the average Social Security retirement benefit is $1,335 per month, and it's one of the only retirement savings vehicles that are not vulnerable to inflation. This isn't a big deal right now while inflation is low, but if the U.S. experiences a period of rapid inflation like in the 1980s, Social Security income will increase accordingly, and retirees will be able to maintain the purchasing power of their benefits.
Most Americans agree that Social Security is important. According to a survey by the National Academy of Social Insurance (NASI):
- 89% of Americans agree that SS benefits are more important than ever.
- 84% believe we should consider increasing future SS benefits.
- 82% believe it's critical to preserve SS for future generations, even if it means higher taxes.
Is Social Security going broke?
The short answer is, "not yet." For 2015, the two vital stats are that the Social Security trust funds are expected to take in $913.9 billion, and pay out $904.7 billion. The program is still taking in more than it's paying out, and is expected to do so for the next few years.
However, this isn't going to last much longer. The following three statistics from the 2015 Social Security and Medicare Trustees' Report give us a good idea of the future path of Social Security.
- The trust funds will experience a cash-flow deficit beginning in 2019, meaning that they will pay out more than they bring in.
- The trust funds will run out of money entirely in 2034.
- After the funds run out, money flowing in to the program will be enough to cover approximately three-quarters of promised benefits.
While Social Security isn't running out of money just yet, that will change soon. Once it does, benefit reductions will be necessary unless Congress makes changes to ensure the program's solvency. However, it's important to note that Social Security benefits are in no danger whatsoever of disappearing completely.
How can we fix Social Security?
There are several actions that can be taken to fix the cash-flow problem before it starts. The possibilities include increasing Social Security taxes, raising the normal retirement age, changing the Social Security wage cap, reducing benefits, changing the cost-of-living calculation, and increasing the number of years benefits are based on.
The most likely fix will come in the form of a combination of these options. According to a report by the NASI, none of these would fix 100% of the problem. In decreasing order of potential impact, the study found:
- 77% of the shortfall could be eliminated by increasing the Social Security tax rate for employers and employees to 7.2% in 2022 and 8.2% in 2052.
- 71% could be eliminated by eliminating the earnings cap over a 10-year period.
- 53% could be eliminated by gradually increasing the SS tax rate by 0.05% per year for 20 years.
- 30% could be eliminated by increasing (not eliminating) the earnings cap to 90% of all earnings over five years.
- 25% could be eliminated by gradually increasing the full retirement age to 70.
- 20% could be eliminated by lowering the cost-of-living adjustment.
- 20% could be eliminated by means-testing SS benefits.
- 15% could be eliminated by gradually increasing the retirement age to 68.
Of course, these are not the only options to fix Social Security -- there could be other ways of prolonging its solvency. Plus, some of these are popular among American taxpayers, while others are not. For example, increasing the retirement age (even to 68) is an extremely unpopular solution, and is unlikely to gain much political traction. On the other hand, as our last two stats show, gradually increasing Social Security taxes is supported by 83% of Americans, and 80% favor gradually eliminating the earnings cap -- so these would be likely components of any solution.
It may surprise you to learn that the most favored package of SS changes would increase Social Security taxes and eliminate the wage cap, on the condition that cost-of-living adjustments were increased as well in order to keep up with rising healthcare expenses, and minimum benefit levels were increased.
Be smarter about Social Security
Social Security is projected to become cash-flow negative within the next few years, but you shouldn't be too concerned about this -- at least not yet. Americans are pretty clear on their opinions that Social Security is worth saving, and I expect congress to step in and ensure the continued solvency of the system, just as they have done in the past.