Wednesday, August 15, 2018

Should we be panicking over Social Security's future? Nope

Social Security facts:    Estimates have 21 percent of married couples living on Social Security alone while 43 percent of single seniors rely on Social Security for 90 percent or more of their income. - Social Security Administration.


Many of my working friends doubt that Social Security benefits will be around when they retire in 20 or 30 years.  If Congress takes absolutely no action, my friends will be partially right.

I don’t lie awake at night worrying about it. Here’s why:

Social Security Administration forecasts have the agency running short on money in the early 2030s. In other words, the reserves in the fund will have been depleted because since 2015 more money has been going out in benefits than is being collected from payroll withholding taxes from workers and their employers. 

That means in 2033 or 2034, beneficiaries would see a 20 to 30 percent cut in their monthly benefit checks when trust fund reserves are gone.

For someone collecting an average monthly Social Security check of $1,254, a 20 percent cut would reduce the monthly benefit to about $960. A 30 percent cut would mean $840 a month.

The program would not go bankrupt, but beneficiaries would receive only the amount of money collected from payrolls in that current year. Social Security Trust Fund reserves that have been padding benefits will be gone.

 Here are some facts to keep in mind:

 Fact No. 1: Social Security is funded through a dedicated payroll tax (FICA) of 6.2 percent of your wages up to a taxable maximum of $128,700. Your employer puts in a matching 6.2 percent. The self-employed pay the entire 12.4 percent but get to deduct half the tax paid as a business expense.

 Fact No. 2: This is a pay-as-you go system, not a savings account. The FICA money coming out of your pay check and the matching money from your employer is funding payments to people now receiving benefits…the retired, disabled, survivors of workers who have died and other beneficiaries.

 Fact No. 3: The ratio of workers to beneficiaries is out of whack because Americans are having fewer children but are living longer. Meanwhile baby boomers (born from 1946-1964) are turning age 65 and retiring at a record pace.

 Fact No. 4:  Luckily, there are many ways to strengthen Social Security for future beneficiaries. Here are the most popular: Lawmakers could slow the growth of initial benefits for higher earners, adjust the retirement age for our growing life expectancy, adopt a more accurate measure of inflation for cost-of-living adjustments, raise the payroll tax rate, or increase the amount of income subject to the payroll tax. All or some of the above would extend Social Security to the end of the 21st Century.

 Congress has faced the short-fall problem before. In 1983, a compromise between Democrats and Republicans rescued the program from a similar crisis. Then as now, Republicans want to fix the problem by reducing benefits -- raising the age when folks can collect full benefits, for instance.  Democrats want to increase program income by raising payroll taxes targeting those with higher incomes.

As part of the 1983 compromise, Social Security became taxable income for many higher income retirees. Would that provision see the light of day, now? Not likely.

In our super-charged political environment, there is intense political conflict over how to extend the life of the Social Security program. Nothing, especially in this mid-term election year (2018), is getting done.

 Meanwhile, there’s a lot of claptrap out there that undermines the ability of our elected representatives to compromise on solutions. For instance, from the start in 1935, Social Security was set up as a pay-as-you-go program. In other words, your payroll FICA tax money is NOT going into a savings account for you but instead is put in a Social Security Trust Fund, which has been and is now managed as a separate account to pay current beneficiaries.

Neither does Social Security tax money go into the federal government's general fund. The revenue is invested in U.S. Treasury securities with interest payments going back into the trust fund.

 Fact No. 5: For many, Social Security benefit money is a significant portion of their monthly income in retirement. Estimates have 21 percent of married couples living on Social Security alone while 43 percent of single seniors rely on Social Security for 90 percent or more of their income.

Every year, administrators at the Social Security Administration provide the U.S. Congress with an update on the program and its revenue challenges. This year’s Trustees Report shows that the Old-Age, Survivors, and Disability Insurance (OASDI) Trust Fund reserves would “become depleted between 2033 and 2034 under the intermediate set of economic and demographic assumptions provided.” That’s if no new legislation is enacted.

At that time (2033-34), “tax revenues will be sufficient to pay only about three-fourths of the scheduled benefits after trust fund depletion,” say trust fund managers.

Will Congress get around to dealing with the projected Social Security short-fall? My belief is that, yes, something will be done to preserve the program despite the gnashing of teeth and crisis rhetoric poisoning our current political discussion.

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