Investor Minute
The Future of Social Security
Social Security has always stirred strong opinions. When it was first proposed during the Great Depression, there was vigorous debate about who would receive it, at what age, and how the program would be paid for going forward. In the decades since, the program has been adjusted many times by Congress. They’ve expanded its role, changed benefit levels and age requirements for various groups, and utilized many accounting maneuvers to keep the program solvent.
Today it’s no different. In February, the Congressional Budget Office released a report warning that the Social Security trust fund is on track to run out of money by 2032. This is a year earlier than their previous estimate.
In response, a bipartisan group of senators has been meeting to discuss possible solutions for shoring up funding for Social Security. They expect to release their recommendations by the end of the year.
Speaking for the group, Senator Mitt Romney said, “It’s a huge topic with enormous interest, and the fact that we have both Medicare and Social Security that are slated to become insolvent within a decade suggests that we need to make sure to save them.”
With a trillion dollars in benefits set to go out in 2023 alone, figuring out how to pay for anticipated increases is a math problem indicating answers few people like.
Social Security is funded through a payroll tax paid by workers younger than retirement age. The steady increase in Americans over 65 as a percentage of the population has meant that fewer and fewer workers are paying to support each retiree. In 1960 the ratio was just over five to one. By 2030 it will be about half that.
Additionally, Americans who reach age 65 are expected to live longer than previous generations, which is good news. But it also means they will draw on Social Security for more years.
If the government simply continues to pay benefits under today’s rules, borrowing the money to make up the difference, it will lead to even more of the federal budget going toward interest payments. But if they just “print money”—spending without a source to pay for it—it will cause the kind of severe inflation that quickly erodes the dollar purchasing power of the benefits.
The most likely solution (one that is sure to make all sides a little unhappy) will be some combination of increasing taxes and raising the qualifying age. Any such changes would likely be phased in. For example, in 1983 Congress approved legislation that has gradually raised the age at which you can receive full benefits. For most baby boomers it’s 66. For those born in 1960 or later it’s 67.
For decades, younger workers have been pessimistic about their chances of receiving Social Security when they retire. Yet Congress has found ways to keep it viable for now. Given the popularity of the program, it’s likely to continue into the future.
As someone saving for retirement, it’s good to be aware of your projected Social Security monthly benefit and the age at which you can begin receiving it. Depending on your situation, it might make sense to delay claiming your benefit. In others, there may be good reasons for taking it early. Talk with your trusted advisor to understand how expected Social Security benefits are factored into your long-term plan. Click this link to schedule a call with me.