Social Security – signed into law in 1935 as the Old-Age, Survivors, and Disability Insurance program – provides cash benefits to retirees and those unable to work due to disability. It is funded by payroll taxes that are collected from workers and their employers and deposited into interest-earning accounts called trust funds. Since the early 1980s, the income collected by the funds has been greater than the benefits paid to people, so the funds have been able to save money for future years.
SOCIAL SECURITY COSTS WILL BEGIN TO EXCEED INCOME IN 2018
The 2018 trust fund report for Social Security predicts that 2018 will be the first year since 1982 that benefits paid out will exceed money taken in through taxes.
Since 2008, the combined yearly surplus has been declining. Although it reversed course and increased in 2016 and 2017, the Social Security Administration predicts it will fall below zero in 2018.
This means we will have to use the savings to make up the difference between how much money the program makes and how much it pays in benefits.
HOW MUCH DO WE HAVE IN SAVINGS?
The Social Security program encompasses two benefit programs – income insurance for retirees and their spouses and income insurance for people with disabilities. Funds for these programs are kept in two separate trust fund accounts and both contribute what is left after paying benefits to savings.
Trust fund balances
While both trust funds currently have a positive balance, once we start using savings, the extra funds will slowly be used up. The Social Security Administration estimates the trust fund savings for disability will run out by 2032 and the trust fund savings for retirement by 2034.
DOES THIS MEAN PEOPLE WON’T RECEIVE BENEFITS AFTER 2034?
No. Without savings to dig into, the programs will only be able to pay people as much as they receive from taxes. Beneficiaries will still receive payments, but those payments will be less than they are now. After 2034, the trust funds predict they will be able to fund 79% of benefits.
Currently, the average monthly payment is about $1,300 for retirees and $1,000 for people with disabilities.
Average monthly payment (adjusted for inflation)
HOW MANY PEOPLE WILL BE AFFECTED BY REDUCED BENEFITS?
Currently, the retirement trust fund supports 50 million people and the disability fund 10 million people.
ARE THERE SOLUTIONS?
There are a number of options:
Reduce benefits to match income from payroll taxes.
Increase payroll taxes in order to pay the current level of benefits or higher. Currently, income is taxed at 12.4% (6.2% each for employer and employee) and income above $128,900 is not taxed at all. We could either increase the tax or increase or remove the ceiling on taxable income.
Change the retirement age again to delay when people can start collecting benefits.
Reduce or eliminate benefits for wealthy retirees.
Privatize the program and let workers invest their payroll taxes themselves.
Financial data from the Office of Management and Budget, Table 13.1 of the historical tables.
Benefit and beneficiary data from the Social Security Administration, Annual Statistical Supplement.
Further information on forecasts can be found in the tables for the 2018 Annual Trustees Report.
Gofinancial response: Wisdom is on the side of preparation, or as the Boy Scouts would say before they melted down, “Be Prepared”. Those who are nervous about the future of social security income might want to consider the benefits of using home equity to level the income factor. See contact information under the “Information” tab on the home page.