The weekend is almost here. Below is my attempt to simplify what's happening with social security. Enjoy!
As things stand, the Social Security (SS) program is projected to run out of reserve funds by 2033 unless changes are made as per the annual report released by the 2024 annual report of the board of trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds (Social Security). This report highlights a significant imbalance between the money coming in and the money going out.
The core problem is the changing demographics and longevity. Over the next nine years, as baby boomers continue to retire, there will be about three people receiving benefits for every one person contributing. This is a stark reversal from the past 40 years. Also, the average life expectancy of a 65 year old in 1940 was 14 years, today its over 20. Consequently, the SS Trust Fund is depleting faster every year as more baby boomers retire and is expected to run out of funds in nine years. When that happens, SS will only be able to pay out what it takes in, which could result in a 23% reduction in benefits.
Obviously, this begs the question, “What impact will this have on me and what do I need to do”.
First, let's first examine the income side of things. Approximately 90% of Social Security's income comes from payroll taxes. Currently, 12.4% of payroll earnings go to SS, with employers and employees each contributing half. This tax generates about $1.2 trillion annually. Some other income sources are the taxes on the SS distributions and interest on the trust fund. The total Income is 1.35 trillion with a T.
On the expenditure side, SS pays out roughly $1.5 trillion in benefits each year resulting in a deficit of roughly 40 billion, which is covered by the SS Trust Fund, currently holding about $2.75 trillion.
Clearly, this isn't a good situation, and addressing it is a complex conversation. Not to mention our government does not have the best record of addressing things in a timely manner. Let's explore some options.
On the distribution side, we could push back the age at which people are eligible to start collecting benefits, potentially raising the full retirement age to 68, 69, or even 70. Given that we're living longer, there's some rationale here. However, this adjustment alone won't solve the problem since it only affects future beneficiaries, not those already enrolled.
Another option is to reduce the benefits people receive. This could be similar to the way income tax brackets work, where those with higher incomes receive reduced benefits or possibly none at all if their income is high enough.
On the contributions side, we have more leverage. Since 90% of contributions come from payroll taxes, we could either tax more people or tax people more. Taxing more people involves a 2 pronged approach the first of which is addressing immigration issues. Many immigrants currently do not contribute to SS and integrating them into the system could make a significant difference. Fixing the illegal immigration situation in this country so that more people could contribute would be helpful. The current estimate, according to migrationpolicy.org is that roughly 11,000,000 unauthorized people currently live in the USA.
The most likely adjustment, in my opinion, is modifying the payroll income tax itself. Currently, SS income up to $168,000 is subject to the OASI tax and this number gets adjusted upward each year with inflation. One approach could be to implement a sliding scale where income over $168,000 is taxed at a higher rate, such as 12% for income above $168,000 and 15% for income above $300,000 and so on. Alternatively, we could simply raise the overall payroll tax rate from 12% to something higher.
None of these options are likely to be popular in Congress and none alone are going to fix the problem. However, if no action is taken, SS will run out of reserves, and benefits will be reduced by about 23% overall. It's probable that a combination of measures will be necessary, but our elected officials may wait until the last possible moment to act.
Given this, there's a very real possibility that your Social Security expectations will need to be adjusted. While this situation is still nine years out, it's something we need to consider. I’ll continue to bring this up throughout the year so you have a clear understanding of the situation and can ask any questions you might have.
In the meantime, please feel free to reach out to me. I'm here to address these issues and others proactively.
Jeremy Raffer, MBA
Director & Wealth Manager
Author “Financial Planning for Widows”
m. 201-747-2705
e. jeremy.raffer@stewardpartners.com
Steward Partners
115 W. Century Rd, Suite 145
Paramus, NJ 07652
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