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How Safe Is Social Security?

By Selena Maranjian - Feb 13, 2018 at 6:49AM

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There's good news and bad news: Social Security is probably stronger than most people think, but retirement benefits might shrink anyway.

Some common American worries are gaining weight, getting wrinkles, and wondering whether Social Security will go bankrupt. According to a 2017 Nationwide Retirement Institute survey, 78% of pre-retirees report being worried "about the Social Security program running out of funding in my lifetime." 

If you're among those wondering how safe Social Security is, you'll be happy to learn that the program is healthier than you might think -- at least for now.

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The Social Security trust fund

Before looking at how safe Social Security is, let's review how it works. Social Security is funded by taxes taken from American's earnings. Workers get 6.2% of their wages withheld as a Social Security tax. Employers cough up a corresponding 6.2%, for a total 12.4% tax on earnings. (Those who are self-employed have to pay both the employer and employee portions, forking over the entire 12.4% on their own.)

For a long time, there has been more money coming in to Social Security than going out, with surplus funds going into "the Social Security trust fund." That trust fund encompasses two funds: The Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund. Managed by the Department of the Treasury, they permit the U.S. government to hold assets collected and keep track of inflows and outflows. There's a board of trustees who watch over the trust funds and report to Congress annually on their condition. By law, funds are spent only on benefits and administration, and assets in the funds are invested only in securities guaranteed by the U.S. government. These investments are structured so that they never lose value. They generate interest that can be used to pay benefits and they can be redeemed or sold over time.

Some people have mischaracterized the process, suggesting that the government is borrowing from, or "raiding" the Social Security trust fund. To help explain why that's not fair, consider this: If someone invests in U.S. bonds, they're giving the government money, and the government is promising to pay back their investment at a certain time (when the bond "matures") and to pay interest. The Social Security trust fund, like someone who buys a bond, is simply investing money and receiving interest along the way.

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Social Security isn't about to go broke

Another common misconception about Social Security is that it's going broke soon, and future retirees shouldn't expect any checks from it. That's not likely to happen, but the program does face some challenges.

Ever since Social Security was created, there have been more Social-Security-tax-paying workers than beneficiaries, and that has kept the system flush with funds. But as people have been having fewer children and living longer, the contributing-workers-to-beneficiaries ratio has been falling. In 1950, the ratio was 16.5, with about 48 million workers supporting close to 3 million beneficiaries. As of 2013, it was just 2.8 -- and it's expected to hit 2.1 by 2035.

The Social Security trust funds have been running a surplus in every year since 1984 -- meaning that they took in more money than they paid out -- but the surpluses have been shrinking and are likely to stop around 2020. Social Security is not a goner then, though. At that point, the system can rely on incoming interest payments to make up the funding deficit -- for a while. According to several government estimates, Social Security funds are likely to see their reserves run dry between 2033 and 2037 if no changes are made. If that happens, payment checks won't disappear, but they'll likely shrink by about 25%. So the worst that is likely to happen to folks expecting to draw checks from Social Security in the coming decades is that they'll receive smaller checks. That is bad news, but it's not the worst news.

Social Security can be strengthened

Fortunately, Social Security can be strengthened, if some changes are made to it, and there's a reasonable chance that changes will be made. There are many possible changes, and some are more popular than others. For example, a survey by the National Academy of Social Insurance (NASI) found that "72% [of respondents] agree we should consider raising future Social Security benefits in order to provide a more secure retirement for working Americans." Meanwhile, a 2016 Voice of the People survey found that 76% of respondents favorably viewed the idea of reducing benefits for those in the top 25% of earners.

Possible changes to Social Security can strengthen the program to different degrees. For example, it's been estimated that 77% of the trust funds' shortfall could be eliminated by increasing the Social Security tax rate for employers and employees from its current 6.2% to 7.2% in 2022 and 8.2% in 2052. (This wouldn't be the first tax increase, either. The tax rate was increased in 1983, in order to bolster the program ahead of many Baby Boomer retirements.)

Another possibility is taxing all of each worker's income, instead of just the first $128,400 of it. Some people may not realize it, but there's a cap on how much of an individual's earnings are taxed for Social Security -- for 2018, that cap is $128,400. Most Americans are taxed on all their income, but those who earn to earn, say, $1,128,400 in 2018 will pay no Social Security tax on $1 million of their income. Eliminating the earnings cap over a 10-year period, so that all of us are taxed on all our income, is estimated to be able to wipe out 71% of the trust fund shortfall.

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It's not all good news

Despite the good news previously mentioned, Social Security's future is more uncertain than ever. The Republican party is currently in charge in Washington, D.C., and many GOP leaders are interested in shrinking Social Security instead of strengthening or expanding it. Here are some of the changes that have been suggested:

  • Increasing the "full" retirement age at which retirees can begin collecting their full Social Security benefits. Right now, it's 66 for many people and 67 for those born in 1960 or later. Some people are calling for the full retirement age to be hiked to 68, 69, or even 70. It's true that Americans are, on average, living longer than they did decades ago, but a later retirement age will still mean a shorter retirement for many people -- and fewer benefits paid to them, too.

  • Basing cost-of-living adjustments for benefits payments not on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) but instead on the "Chained CPI," which is more conservative. The Chained CPI assumes that consumers, when faced with a big price increase in one item, will look for cheaper substitutes, and it would result in smaller cost-of-living adjustments for beneficiaries.

  • Cutting back benefits for those wealthy enough to not need them so much. This won't be popular with wealthier Americans, who could argue that they paid into the system so should benefit from it. But it would remove many people from the pool of beneficiaries, saving money.

  • Privatizing Social Security. Many in the GOP would like Social Security fully or partially privatized. This could take various forms, such as Americans being put in charge of investing in retirement funds for themselves, perhaps through an investment company -- not unlike how individuals manage their 401(k) accounts. Its downsides include the fact that many people are not financially savvy and may not do well managing these vital funds, and that an economic downturn could significantly shrink many people's retirement coffers.

Since Social Security is vital to so many of Americans, it's smart to know more about it and to keep up with developments regarding it. Know, too, that there are ways people can increase their Social Security benefits. Individuals might also want to make sure their representatives in Washington, D.C. know whether they would like them to protect or strengthen the program.

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