Will Social Security be There?
Q: I am 42 years old. I have been working through my financial plan and I am wondering if I should count on receiving a Social Security benefit when I retire. The Social Security website says the trust fund reserves will be depleted by 2034 and “payroll taxes will be enough to pay only 79 cents for each dollar of scheduled benefits.”
A: You aren’t alone in your concerns about Social Security. A few years ago, AARP asked 1,200 adults about their confidence in Social Security. Two-thirds of the respondents said it is one of government’s most important programs and four out of five respondents said they either rely, or plan to rely, on Social Security in retirement. However, only 42% were “very” or “somewhat” confident in the program’s future. Pessimism was even more pronounced among younger respondents--those aged 18 to 29. Of this group, 55% agreed “completely” or “somewhat” with the statement “Social Security won’t be there when I’m ready to retire.”
Social Security is plagued by a basic actuarial fact: in about four years, Social Security will start spending more on benefits every year than it collects in revenues. To meet the shortfall, Social Security will start tapping its trust fund and by 2034 the trust fund will be depleted. At that point, unless Congress changes something, projected tax revenues will only be able to cover 79% of the projected benefits. As the number of people receiving benefits increases relative to the number of workers paying into Social Security, the shortfall will worsen.
A number of proposals are being discussed, but there are really only two ways to fix the system—we either cut benefits or increase taxes. Every proposal is some permutation of these two basic approaches. And although either option is politically difficult, the longer we wait, the more painful the solution will be.
One idea is to raise the full retirement age. We did this once already (in 1983) with pretty good success. Supporters say this approach is reasonable since people are living longer. When Social Security was launched in 1935, a 65 year-old man was expected to live 13 years in retirement; now he is expected to live 18 years. Since longevity gains have accrued primarily to the well-to-do, opponents claim this will unfairly punish low-earning workers.
A related approach is to index benefits to gains in population longevity. Under one version, the monthly benefit would be reduced as longevity increases. Under another version, the full retirement age would increase. Both approaches would make a meaningful impact on the funding gap. However, once again opponents claim these options unfairly target low-earning workers.
Another idea is to reduce benefits for those above certain income levels. For example, benefits could be reduced for the highest-earning 50 percent. Benefit reductions would begin small and increase on a sliding scale up to a 31 percent reduction for the highest earning workers. Supporters claim this would close the funding gap with a little wiggle room to spare. They reason this approach is consistent with Social Security’s original intent: to protect against poverty in old-age. Opponents, on the other hand, worry this would actually hit middle-income Americans the hardest, since their benefits would be cut and they have come to rely on Social Security in retirement.
As you consider your financial plan, you can be confident that some form of Social Security will be waiting for you when you retire. However, the amount of your benefit and the cost required to secure your benefit are still very much up in the air.
Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to: firstname.lastname@example.org