Financial Planning Fridays #96: The Future of Social Security

Social Security was paid to 67 million Americans last year and is a key component of retirement for many of them. According to the latest report from the Social Security Board of Trustees released last month, the Social Security Trust Fund is now projected to run out of funds by the end of 2034. This is a scary headline, but I wanted to share a few important conclusions I made after reading the report. 


First, is that the depletion of the SS trust fund does not mean the Social Security Administration will stop paying out benefits. Approximately 92% of benefits are currently funded by payroll and income taxes collected annually, with only about 8% coming from the Trust Fund itself.

In 2035, when the trust fund is expected to be largely depleted, the incoming taxes are still projected to cover 83% of the benefits. Moreover, looking further out, the report indicates that by 2098, 75 years from now, that 73% of benefits will still be payable, as illustrated in this chart.

To address this potential shortfall before 2035, several measures may be taken:

  1. Increase Payroll Taxes: Raising the payroll tax rate or the cap on taxable earnings could generate sufficient revenue to maintain the program’s current benefits. Even a small increase can make a significant difference. This would not be unusual, the original social security tax was 1% when the program started and has risen to 6.2% today.
  2. Raise the Retirement Age: As life expectancy rises, the retirement age could be increased. This was last raised in 1983 and is likely to be considered again.
  3. Implement Means Testing: Benefits could be reduced or eliminated for individuals with a certain minimum income or net worth.
  4. And our favorite, they can diversify the investments inside of the trust: Investing some of the Trust Fund into long-term investments like U.S. stocks, as we discussed in Financial Planning Fridays #87, could potentially yield higher returns and help to maintain the trust fund over time. 

While the Social Security Trust Fund is scheduled to run out of money in the next decade, most of the benefits will continue to be paid as promised. Also, with a few small updates before then, it is possible to maintain the full benefits projected. 

We often look at a variety of social security projections and ages to begin collecting when we prepare financial plans for clients. Please let us know if we can also help you with this. 

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