Social Security has been around since 1935 and was designed as a contributory system where workers pay into a fund that will provide benefits when they retire.
The program has two parts: Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI), each supported by a Trust Fund and overseen by a Board of Trustees.
The Social Security Act requires that the Trustees report annually to Congress on the actuarial status and financial operations of OASI and DI Trust Funds. The latest report was released on March 31, 2023.
Issues regarding the long-term health of Social Security have been raised by the Trustees responsible for the Social Security system.
Having some perspective on the current state of the fund, and its future solvency, is important for retirees who receive benefits, and for those who expect to rely on benefits in the future.
At the end of 2022, OASI and DI were providing benefits to about 66 million people, and during the year, an estimated 181 million people had earnings covered by Social Security and paid payroll taxes on those earnings.
The total cost of the program in 2022 was $1.244 trillion, and total income was $1.222 trillion. Income comes from two sources: non-interest income (contributions from workers) which was about 95% of total income, and interest earned on investments, which accounts for the remaining 5%.
Under the Trustees’ current assumptions, Social Security’s total cost is projected to be higher than its total income in 2023 and all later years. Total cost first exceeded total income in 2021.
From an actuarial standpoint, the Social Security program remains solvent for the next ten years. The chart below from the Social Security Administration shows the projected Trust Fund balance through 2033.
The problem is that, unless changes to the system are made soon, the Trust fund reserves will be depleted by 2034 and collections from workers will not be enough to maintain the benefits of recipients.
The reason for the impending depletion is demographics: the retirement of Baby Boomers is increasing the number of beneficiaries faster than the increase in the number of workers paying into the system.
To put the Trust fund and the system on a path of long-term sustainability (which the actuaries define as the next 75 years), the Trustees suggest the following:
- Revenue would have to increase by an amount equivalent to an immediate and permanent payroll tax increase of 3.44 percentage points, to 15.84%;
- Or scheduled benefits would have to be reduced by an amount equivalent to an immediate and permanent reduction of 21.3% applied to all current and future beneficiaries
- Or scheduled benefits would have to be reduced by 25.4% if applied only to those who become eligible for benefits in 2023 or later
- Or some combination of the above
The Trustees conclude with a call to action for lawmakers to address the projected Trust fund shortfalls in a timely way so that necessary changes can be phased in gradually to give workers and beneficiaries time to adjust to the changes.
The Trustees’ sentiment of giving workers and retirees time to prepare and adjust to impending changes is prudent.
Demographics are unlikely to change quickly, and the action that Congress decides to take (or not take) is unknowable. The proverbial “can” could be kicked down the road by politicians for several years until the problems become more acute.
One way to prepare for potential future changes to Social Security benefits is to ‘stress test’ your financial plan. Our MoneyGuide financial planning software allows us to do this. The Social Security module in the software facilitates testing for a range of benefits reductions and helps you see how this affects the long-term results of your financial plan.
Susan and I recognize that contemplating negative impacts to your financial plan can cause discomfort. We’re able to model different Social Security outcomes and work with you to think through financial planning options.
Visualizing a range of outcomes and having a plan for adjusting to different circumstances prior to any change in Social Security may ease anxiety and help you look more confidently toward the next decade and beyond.
