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Some Good News for Social Security -- but Don't Get Too Excited

By Matthew Frankel, CFP® – Apr 28, 2019 at 7:02AM

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Social Security’s financial condition improved in 2018. Is it enough to make a difference?

The 2019 Social Security Trustees Report was just released, and we now know how the program did financially in 2018, as well as the latest long-term financial forecasts. And there was some good news. The program ran at a surplus, and Social Security's long-term financial problems don't look quite as bad as they did a year ago.

However, it's important for Americans to realize that Social Security is still on a path to insolvency if nothing is done to fix the program's issues. Here's a rundown of what we just learned about Social Security's finances, and why there's still a major problem to deal with.

Social Security card in a roll of money.

Image source: Getty Images.

What improved from last year's report?

First, the good news. As I mentioned, there were a few positive developments worth noting that make Social Security's long-term financial condition not quite as dismal as it appeared a year ago:

  • Social Security's reserves increased by $3 billion to $2.895 trillion at the end of 2018. This is significant, as Social Security's reserves are invested in interest-bearing securities, and the more money the program has in reserves, the higher its interest income will be.
  • Fewer people are applying for Social Security disability benefits than expected. In fact, the expected disability incidence rate dropped from 5.4 per thousand people in last year's report to 5.2 per thousand.
  • The long-term actuarial deficit, defined as the next 75 years, dropped from a projected 2.84% of taxable payroll in last year's report to 2.78%. In other words, it would take less of a tax increase to completely fix Social Security than previously thought.

Obviously, there's a lot more to the 270-page Trustees Report than I can discuss here. However, the key takeaway is that the Social Security program's long-term financial condition is looking a little bit better than it did a year ago.

The result: an extra year of solvency

So, what does all this mean? The overall effect of the statistics I mentioned is that Social Security is going to be solvent for a little longer than previously expected.

It's well known that Social Security isn't in the best financial condition from a long-term perspective. Now that the massive baby boomer generation is starting to reach retirement, Social Security is expected to run deficits beginning in 2020 and every year thereafter for the foreseeable future. In short, the retirement of this huge group will mean that fewer people will be in the workforce paying into Social Security, and more people will be retired and collecting Social Security benefits.

Based on last year's Trustees Report, these deficits were expected to cause Social Security's reserves to be completely depleted in 2034. Now, based on the latest projections, Social Security isn't expected to run out of money until 2035 -- a year later.

It's still important for Congress to act quickly

Thanks to some revised assumptions, Social Security's financial future looks slightly better now than it did a year ago. However, to be perfectly clear, Social Security still isn't close to being sustainable over the long run.

There are several ways we could fix Social Security. I briefly mentioned a payroll tax increase, and that would certainly be one way to go. We could also increase or even eliminate the maximum amount of earnings subject to Social Security taxes each year, raise the full retirement age, or reduce benefits for high-income retirees, just to name a few possibilities.

However, whatever the ultimate fix turns out to be, it will be far less painful if it's done sooner rather than later. Using the tax increase example, it would be easier to phase in a payroll tax increase over a 15-year period than it would be to wait until 2034 and implement a massive increase all at once.

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