Social Security’s surplus is turning to a deficit. We discuss what’s happening with the trust funds that back up the system and suggest steps you can take to boost your income in retirement.
What’s Up With the System? The Social Security Act was passed in 1935 and the Social Security Administration began paying regular ongoing monthly benefits in 1940. Currently, about 62 million Americans collect benefits from the system and 174 million workers pay into the system from their earnings. Each year for the past 35 years, income collected has been higher than total costs. In 2017, income was nearly $1 trillion, and expenditures just over $950 billion. Surpluses have been accumulating. The trust funds now total almost $3 trillion.
The Trustees of the funds released their 2018 Annual Report this week. It has gotten some attention mainly because the Trustees expect the surplus to turn to a deficit this year. The chart below, from the Wall Street Journal, depicts the projected income and expenditure gap, and shows this gap growing wider into the foreseeable future.
Should You Worry About Your Benefits? This is as much a political question as an economic one. The vast majority of the benefits paid out are a transfer of tax dollars paid in each year. The $3 trillion of trust funds, which will be used to make up the gap going forward, are invested in “special issues” of the United States Treasury. These are non-marketable, interest-bearing IOUs of the US government.
Based on the Trustees’ projections, the trust funds are likely to be depleted within the next 20 years. Because employed people are required to pay in, resources will still be available for retirees. Under one set of assumptions, if changes to the system aren’t made, about three-quarters of scheduled benefits could be paid each year once the trust funds run out.
The solvency of the federal retirement benefits system is based on the U.S. government’s taxing power and willingness and ability to make good on its promises. Going forward, the gap between taxes collected and Social Security benefits paid out must be bridged. We see several possibilities, including higher taxes, borrowing, benefit cuts, or some combination of these measures.
What Can You Do? Keep in mind that basic income provided by Social Security was designed to partially replace lost earnings at retirement. Based on this objective, the system will likely live far into the future. Having a sense of what your projected benefit is, how it fits into your long-range financial plan, and knowing how you might handle a reduction in this source of guaranteed income is probably the most important step you can take. We discuss some of the nuances of understanding your Social Security benefits here.
Rob Kania is Principal and Co-Founder of Laurentide Advisory