When we do retirement planning one question that often arises is whether or not you can count on Social Security being available when you retire. This concern arises each year when the Social Security trustee report is published and the media is looking for another catchy headline to grab “eyeballs” to the webpage or newspaper, so they lead with headlines like “Social Security to run out in 2034.” While the headline may be true, like most things in life, it’s complicated. It is true, that in the 2017 Social Security Trustee report, the Social Security trust fund is estimated to be depleted in the year 2034, but there’s more to the story.
The Social Security system is basically made up of three pieces, revenue from payroll taxes, payments to beneficiaries and the Social Security trust fund. Whenever there is more money coming in from the payroll taxes than going out to beneficiaries it generates a cash surplus that goes into the Social Security trust fund. Since 1982 the cash surplus scenario has played out and this trend is projected to continue through 2021. After 2021, it is projected that Social Security expenses will be greater than payroll tax income, which means funds will need to be pulled from the trust fund to cover payments to beneficiaries. Furthermore, the report predicts that the Social Security trust fund will be depleted in 2034, hence the news stories.
So what happens after 2034 if nothing changes between now and then? Well, income from Social Security taxes are projected to cover about 75% of the expenditures from 2034 through 2091 (the end of the report’s projections) so one could argue we simply cut everyone’s benefits by 25% and call it a day. However, the cynical side of me says that the political party in control at the time Social Security payments get reduced would be committing political suicide, so they would not let that happen.
So what other options are available? There are several; perhaps the most beneficial would also be the least popular. As of 2018, the Social Security tax has a wage base limit of $128,400, which is the maximum income that can be taxed for Social Security benefits. This means that somebody earning $200,000 would not have to pay the 6.2% Social Security tax on the additional $71,600 of income ($200,000-$128,400). Therefore, one option would be to raise the wage base limit, which would increase the amount of revenue coming into the trust fund system.
Another oft-talked about option is raising the full retirement claiming age with the idea being that people are living much longer today than when Social Security was first established and this is placing a big drain on the system. When the Social Security Act was passed in 1935 the average life expectancy often stated is somewhere around 58 for men and 62 for women, yet the full claiming age for Social Security was 65. However, because infant mortality was so high in the early 20th century, I don’t think average life expectancy at birth in 1930 vs 2018 is a good comparison. A better comparison would be life expectancy after attainment of age 65. The average life expectancy of those individuals who made it to 65 in 1940 was 77.7 years. For those individuals today that attain age 65, their life expectancy is 84.3 years. When using those two numbers, the discrepancy in life expectancy is not as great as comparing life expectancy at birth. Therefore, the biggest difference is not in the life expectancy age, but rather demographics. Due to the “baby boomer” generation, there are currently more people collecting benefits than individuals paying into the system, though that could change in the future as demographics shift again.
So to answer the original question, is Social Security going to be available when I retire? I give a resounding “yes!” There are several options the government has at their disposable to more fully fund the trust fund after 2034 or more subtle changes like raising the claiming ages. Either way, it is still relevant to include Social Security estimates in your retirement projections.