Will Social Security Be There for Me When I Retire?

One common worry among American workers, especially the younger end of the age spectrum, is whether Social Security will still be around when they're ready to retire. This is certainly an understandable concern. After all, there seem to be constant headlines about how much trouble Social Security is in, and many workers haven't exactly done a great job of saving for retirement on their own.

With that in mind, here's a look at the current and projected financial state of Social Security, what the problem is, and what changes could be coming in the years ahead in an attempt to fix the problem. While nobody can predict the future with perfect accuracy, this rundown of the facts can give you a good idea of where Social Security could be heading in the future.

Image Source: Getty Images.

The financial state of Social Security

On the surface, Social Security appears to be in pretty solid financial shape. The program has approximately $2.9 trillion in reserves – enough to cover all of the program's expenditures, including all retirement, survivor, and disability benefits, for about three years, even if no more payroll taxes ever came in.

Not only does Social Security have lots of money in reserves, but the program actually ran a surplus in 2017. The recently released Social Security trustees report revealed that Social Security took in $44 billion more than it spent last year, so its reserves actually grew by a fair amount.

So, don't believe the false rumors you may have heard about Social Security. Social Security is not broke, bankrupt, or insolvent right now, or any variations of those terms that many in the media and on the internet might have you believe.

Another unfortunate rumor circulating the internet is that the government "raided" Social Security's reserves and spent all of the money on other things. According to these rumors, there really are no reserves – it's just a lie.

This rumor is partially true, in the sense that Social Security's reserves aren't simply a pile of trillions of dollars sitting in a warehouse or bank vault somewhere. Not only would this be impractical, but it would be fiscally irresponsible of the Social Security trustees to keep the money in cash, earning little or no returns.

Instead, Social Security's reserves (formally known as the Old Age, Survivors, and Disability Insurance, or OASDI trust funds) are invested in Treasury securities, which generate quite a bit of interest income for the program. In fact, $85 billion of Social Security's 2017 income came from these investments. This is essentially the same thing as if you took your savings and invested them in Treasury bonds -- sure, the government technically has your money, but you're entitled to your money back at a certain point, as well as interest payments in the meantime.

The takeaway is that Social Security is financially strong for now. So, if you're currently receiving a Social Security benefit, or are expecting to claim your benefit soon, there's no need to worry -- there's plenty of money there.

It is likely to go downhill, and fast

Unfortunately, that's the extent of the good news. The surplus Social Security ran in 2017 is the last one that's expected for the foreseeable future. Deficits are expected to begin in 2018 and grow larger in a hurry. Here's a look at the income and expenditures of Social Security, or OASDI, according to the intermediate assumptions of the Social Security trustees.

Data Source: 2018 Social Security Trustees Report.

As a result of these rapidly growing deficits, Social Security will need to tap into its reserves to make ends meet. By 2034, just 16 years from now, Social Security's reserves are expected to be completely depleted. In other words, Social Security benefits paid out between now and then are expected to exceed the incoming payroll taxes and investment earnings by nearly $3 trillion.

If no changes are made, across-the-board benefit cuts will become necessary at that time. Incoming payroll taxes and some other smaller sources of income will only be enough to cover about 77% of promised benefits. However, this brings us to an important point. Even if nothing at all is done to fix Social Security, the program will still be able to pay more than three-fourths of your benefits.

What's the problem?

A natural question to ask at this point of the discussion is "why is Social Security's financial condition expected to go so bad, so fast?" After all, how does the nation's key retirement program go from nearly $3 trillion in reserves and annual surpluses to massive deficits and empty pockets in less than two decades with no major changes to the program except an increase in the full retirement age? This is certainly a fair question.

There are two main problems facing Social Security over the coming decades: Longevity and mass retirement. Let's look at these one at a time.

As far as longevity goes, it shouldn't be a big surprise that Americans are living longer lives. Thanks to medical advances and the trend toward healthier lifestyles, Americans are living longer than ever before, and this trend isn't expected to reverse anytime soon.

Here's why this is important. The average 62-year-old male in 2015 (the latest available data) could be expected to live another 20 years, according to the SSA. Just a decade prior, the life expectancy for a 62-year-old man was 18.9 years. In other words, a man who claims Social Security at age 62 today can be expected to draw benefits for more than a year longer than the average beneficiary 10 years ago. Similar trends exist for women and for other ages as well:

Data Source: SSA actuarial tables. All figures are rounded to the nearest tenth.

The second problem is the mass retirement caused by the baby boomer generation gradually reaching retirement age over the next decade and a half or so. In short, more people will be leaving the workforce (and paying Social Security taxes) than will be entering it.

The overall effect of this will be far fewer people paying into Social Security per beneficiary than is necessary to adequately fund the program. For the past few decades, there have been 3.2 to 3.4 people paying Social Security taxes for each beneficiary drawing retirement income. In 2017, this had fallen to 2.8, which was still enough to fund Social Security, but just barely. However, by 2035, when most baby boomers will have retired, this is expected to plunge to just 2.2 workers per beneficiary. That's why Social Security will need to tap into its reserves.

A tax increase could fix the problem

There are a couple of ways we could fix Social Security's funding gap, which is estimated to be $13.2 trillion (in present value) over the next 75 years. Most of the potential solutions can be grouped into two categories – tax increases or benefit cuts.

The Social Security Administration estimates that a 2.78% immediate payroll tax increase would close the funding gap for the foreseeable future (defined as the next 75 years). Remember that half of the Social Security payroll tax is paid by employers and the other half is paid by employees, so this would mean an additional 1.39% tax on up to $128,400 of earned income in 2018 for every American worker.

Another way to increase taxes would be to raise the taxable income cap, or to remove it entirely. In fact, a study by the National Academy of Social Insurance found that removing the cap altogether over a 10-year phase-in period -- in other words, making all earned income subject to Social Security tax – would solve 74% of the funding gap all by itself.

Benefit cuts could be in store as well

If we don't want to raise payroll taxes, the Social Security Administration found that a 17% across-the-board benefit reduction implemented right away would also solve the problem. The issue with this is that any across-the-board cuts are extremely unpopular on both sides of the political spectrum and are therefore unlikely to gain any significant traction.

However, there are ways to cut benefits without an across-the-board cut. Raising the full retirement age is a rather popular example and has even been suggested by Democrat Warren Buffett. The reasoning makes sense -- people are living longer, and staying active and healthy for longer, so maybe retirement should start later. In fact, the full retirement age is going up right now as part of the last Social Security fix, which we'll discuss in more detail later on – gradually increasing from 66 years old for Americans born in 1954 or earlier to 67 years old for Americans born in 1960 or later.

In addition to raising the retirement age, other benefit-cutting solutions include means-testing Social Security benefits for wealthier retirees or changing the way Social Security cost-of-living adjustments are calculated (which was actually done as part of the Tax Cuts and Jobs Act).

Some combination of changes is the most likely outcome

The most likely reform package for Social Security would include some combination of these benefit-cutting and tax-increasing solutions. And, the solutions would likely be implemented gradually, similar to how the current increase in the full retirement age is being phased-in. In other words, we're unlikely to see an immediate, massive tax increase or an immediate cut to benefits.

For example, in the National Academy of Social Insurance report I referred to earlier, the most popular reform package was found to be eliminating the taxable wage cap over a 10-year phase-in period and also gradually raising the payroll tax by 1% each for employers and employees. Not only would this combination solve the funding gap, but it would also allow the COLA calculation method and the minimum Social Security benefit amount to be increased.

Other ways we could fix Social Security

In addition to these options, there have been a variety of other proposed solutions to our Social Security problem. Just to name a few:

• Some lawmakers have proposed using estate tax revenue to help fund Social Security, although this would add to federal deficits.
• Privatization of Social Security has been discussed many times but has never gained serious traction. This would mean that some, or all, of a worker's Social Security taxes would be placed in retirement accounts that could be invested as the worker sees fit.
• A one-time buyout for wealthy individuals. In other words, instead of collecting a benefit for life, individuals who don't really need Social Security could opt for a one-time cash payment.
• One Republican congressman has proposed allowing student loan borrowers to voluntarily raise their full retirement age in exchange for student loan forgiveness. The idea is that this could help solve the student debt crisis while simultaneously having a meaningful impact on the Social Security funding gap (it would take care of about 11%).

If you're retiring soon, don't worry

If you're close to retirement age, say 50 years old or older, you don't need to worry. None of the serious proposals to fix Social Security call for making changes to the program for current retirees, or those Americans reaching retirement age soon. In the latest presidential election cycle, almost all candidates specifically mentioned preserving benefits as-is for older Americans when discussing their plans.

However, it's important to point out that I'm only referring to modifications to the program itself, such as raising the full retirement age or means-testing benefits. In other words, if Congress decides to raise the full retirement age to say, 70 years old, it's unlikely to affect anyone that's even close to Social Security age now. If a tax increase is part of an eventual Social Security reform package, however, it will likely affect all Americans regardless of age.

History tells us something will be done

As a final thought, it's worth pointing out that this isn't the first time Social Security has run into financial trouble. In fact, Social Security's financial situation in the 1970s actually looked a lot like it does today. Incoming revenue wasn't enough to cover promised benefits, deficits began in 1975, and the trust funds were projected to run out of money in mid-1983.

While lawmakers waited until close to the last minute to act, the Social Security Amendments of 1983 were signed into law by President Ronald Reagan on April 20, 1983.

How did we fix Social Security then? The short version is that the reform package:

• Made up to one-half of Social Security benefits subject to income tax, which goes straight back into the program.
• Set in motion the gradual increase in the full retirement age to 67, which is still being phased-in today.
• Accelerated an already-approved increase in the Social Security payroll tax.
• Delayed the 1983 COLA by six months and provided for future COLAs to be made in January of each subsequent year, not July.
• Mandated that new Federal employees would be included in the Social Security program.

While this reform package didn't solve Social Security's financial problems for good, they did extend the trust fund depletion date from 1983 all the way through the currently projected depletion date of 2034 -- a 51-year extension. A similarly effective reform package implemented now would take care of Social Security until 2085, and I don't think most Americans would be too upset with that result.

So, will Social Security still be around when you retire?

Here's the bottom line. While it isn't a 100% certainty that Social Security will be around for generations to come, there's an extremely high probability that it will. The majority of Americans of every age group, income level, and political affiliation believe that Social Security is important to preserve for future generations, and without major benefit cuts. In a nutshell, Social Security will most likely be around when everyone who is reading this reaches the age of eligibility.

Having said that, the uncertain part is what will change between now and then. Will payroll taxes be higher or will more of high-earners' incomes be subject to Social Security tax? Will the annual cost-of-living adjustments be calculated in a different manner? Will the benefit formula change? These are the questions that are up to lawmakers to answer sometime within the next 16 years -- and hopefully sooner rather than later.