Not surprising, there has been a lot of discussion about Social Security reform since the SSA announced the Social Security Trust Fund is expected to run out of money in 2033, three years earlier than expected in the previous report.
Once again the media has been our biggest enemy when it comes to consumer confidence. In their efforts to boost ratings, the media has focused on the bad and ignored the good. Unfortunately many people are taking Social Security early (for some this is ok, but for others they are leaving money on the table that could help them in their later years) as a result of the media’s scare tactics.
So what’s really going on with Social Security? In case you missed the press release from the Social Security Board of Trustees last week, here is the gist of the situation:
- According to the Board of Trustees, the combined fund (which supports both the Social Security and Medicare programs) will be exhausted by the year 2033, three years sooner than projected in last year’s report.
- Most troubling is the Social Security Disability Fund, which is expected to run out of funds by 2016
- The part of the trust fund that supports Medicare is expected to run out of money by 2024
- When the trust fund is exhausted there will be enough income coming in (from payroll taxes) to cover about 75 percent of benefits.
Now let’s discuss what this really means to Americans who are relying on Social Security for retirement, disability or other needs.
1. Nothing has changed. Yes, Social Security has problems, but this is old news. The media needs ratings, so they will sensationalize, exaggerate and tell embellished stories if it will get you to visit their website or watch their station over another. The silver lining in all of this is that all the negative focus will force the government to address Social Security’s problems sooner rather than later.
2. It could be a lot worse. Despite the fact that the media would have you believe that Social Security is already broke, we still have 21 years of full funding left. The last time major changes were implemented to Social Security was in the early 80s when Social Security was facing insolvency in 4-6 months. In this case it is projected to be over 20 years before the trust fund runs out of money.
3. Even if the trust fund runs out of money, benefits will still be paid. The trust fund is used to cover the difference between income and expenses. Even if/when the trust fund runs out, there will still be income (from workers who pay payroll taxes) to pay out benefits. It’s possible that benefits may have to be reduced (or other measures will need to be taken), but they will still be paid. As of today, the trust fund is projected to be able to fund 75% of benefits when the fund runs out in 2033. Which means the worst case scenario is that in 21 years there will be a benefit reduction of up to 25% – if no action is taken before then. However, even as slow as Congress is to implement anything, changes are expected to take place long before then to make sure the trust fund does not get depleted.
4. People age 55 or older will probably not be affected. Yes, there will be changes, but people under age 55 are more likely to see them than if you are closer to retirement. If you are under age 55, when planning for retirement, a good assumption is to reduce your estimated benefits to 75% (or 85% if you are closer to retirement) when running your projection. It’s unreasonable to assume that you won’t receive any benefits, but a reduced benefit is appropriate when planning for retirement as there are likely to be some changes to Social Security before you retire.
5. The aging population is not entirely to blame for the shortage in funds. Yes, there are millions of baby boomers getting ready to retire, and the fact that there are fewer workers than beneficiaries will put a strain on the trust fund, but there are other problems as well so you can’t put all the blame on your parents and grandparents. But the economy is also a factor; when there are fewer jobs then there is less wages and therefore less tax being collected from workers to fund Social Security. Politics and tax law changes are other factors leading to the shortage in funds.
6. Cutting benefits isn’t the only way to fix Social Security. There are many things that can be done to help shore up the trust fund, including:
a. Cutting benefits – I said this wasn’t the ONLY way to fix Social Security, not that it wasn’t still an option. If no action was taken, the trust fund would be out of money in 2033 and beneficiaries would be forced to receive a 25% benefit cut. Taking steps now will eliminate more painful measures later.
b. Increasing the retirement age – currently you can start collecting benefits as early as age 62 and full retirement benefits for people born after __________ is age 67; one or both of these ages could be increased in the future
c. Increase the Social Security wage base – this is the amount of wages earned that Social Security taxes must be paid on. The cap for 2012 is $110,100. Increasing this limit will mean that higher earners will contribute more to Social Security; this change would not affect workers who earn less than the cap.
d. Increase the Social Security tax rate. It is currently 4.2% thanks to the payroll tax holiday, but the rate before the tax cut was 6.2%. Changing the rate (vs. increasing the wage base) would mean all workers would pay more into the system.
e. Increase the amount of taxable Social Security to beneficiaries who have other income.
7. Change will be slow. As you’ve probably noticed our government moves at a snail’s pace. And our politicians can’t agree on anything. And Social Security is a big, complex program. And we’re in an election year. So don’t expect a quick fix, this one’s gonna take a while…
Bottom line, yes, Social Security is facing a shortfall in the trust fund, but it’s a manageable shortfall. And while there’s no magic pill that’s going to make everything better overnight, there are several reasonable proposals to strengthen the Social Security program. Let’s hope that Congress can agree on a combination of revenue increases and benefit cuts to stabilize Social Security soon, so we can restore confidence in Americans that they will receive benefits when they need them.
In the meantime, if you’re close to retirement age and are facing the decision of when to start your Social Security retirement benefits, it is recommended that you consult with a financial planner who is knowledgeable about Social Security to help you make that decision.