Business & Real Estate

Worried about Social Security going broke?

Concerns about Social Security running out of money pop up from time to time in the financial media. Beyond the headlines are a number of misconceptions regarding what that really means. Below I’ll explain what could happen and what the consequences might be. The situation is a lot less dire than the media would have you believe.

There are two primary sources of funding for Social Security benefits: the Social Security trust fund and payroll taxes collected from current workers and their employers. The trust fund currently holds approximately $2.8 trillion but is projected to become depleted by 2034, based on the number of retirees drawing benefits over the next 15 years.

That doesn’t mean, however, that those benefits would disappear. Even if Congress were to do nothing to fix the system before that date, retirees would still be able to receive 79% of their promised benefits through 2090, just based on payroll taxes. According to Forbes.com, if only a small 2.7% payroll tax increase were to be implemented today (1.35% for the employee and 1.35% for the employer), no cut in benefits would be needed. Even if Congress waited until 2035 to make such a fix, it would require only a 3.7% bump in payroll taxes to stabilize Social Security moving forward. So the likelihood that retirees stop receiving Social Security benefits – or be forced to take a cut – is actually pretty low.

Additional concerns

What are other concerns people have expressed about Social Security?

With all the political haranguing these days over immigration, some fear that Social Security resources are being increasingly drained by undocumented immigrants. In reality, it’s actually the opposite. Undocumented immigrants cannot claim Social Security benefits yet pay payroll taxes into the system. AARP determined that Social Security gained $12 billion from undocumented workers and their employers in 2010 alone.

What about untrustworthy politicians who might be inclined to raid the Social Security trust fund to pay for pet projects? In fact, the trust fund has never been part of the general fund and therefore cannot be used for any purpose except for paying Social Security benefits. While the government has occasionally borrowed money from the fund, it is obligated to pay back everything, including interest.

Another misconception is that members of Congress have their own retirement system independent of Social Security, making it easier for them to be less concerned about Social Security because it does not directly affect them and their families. While this had been true prior to 1984, today all federal employees (including the president) pay into and receive benefits from the Social Security system.

Potential fixes

This is not to say that changes aren’t necessary. To save costs, the Social Security retirement age has already been pushed out to 66 and will reach 67 in a few years. The government could very easily delay it further.

Increasing payroll taxes is another bipartisan-supported way to avoid having to cut future benefits to seniors. Higher-income retirees now have 80% of their Social Security income taxed (compared with only 30% for lower-income taxpayers). That could easily be raised to 100%.

One of the most likely changes involves the calculation of inflation, which the federal government has already changed for income tax brackets as part of the 2017 tax overhaul. The new income-tax inflation measure (based on what is called the Chained Consumer Price Index) increases more slowly than the previously used CPI for urban consumers. It wouldn’t be surprising if Congress makes the same change for Social Security.

In short, while work is needed to keep the Social Security trust fund solvent, there are lots of options, many of which would not have a big impact either on workers or on seniors. So don’t worry about the disappearance of Social Security. There are other more important things to worry about these days.

Los Altos resident Artie Green is a Certified Financial Planner and principal at Cognizant Wealth Advisors. For more information, email This email address is being protected from spambots. You need JavaScript enabled to view it. or visit cognizantwealth.com.

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