By Eric Reich
Many people are skeptical when I discuss their Social Security benefits as a part of their retirement plan. The common refrain is that they don’t want to count on Social Security because “it’s going to run out of money soon.” Today, I thought we should clarify what it means for Social Security to “run out of money” and what the implications are for those planning for retirement.
First, what is the Social Security trust fund? It is actually two separate funds that are set up to pay regular Social Security benefits and the other is for disability benefits.
The “regular” Social Security trust fund currently has a surplus of around $2.9 trillion dollars. However, starting with 2021, that reserve has started to deplete. The fund is expected to be depleted by 2033 according to the Social Security Administration. The disability trust fund is scheduled to run out in 2057.
If a solution to the problem is not reached prior to 2033, then the administration would only be able to pay benefits equal to 76% of the current retirement benefit level through 2098. Yes, that’s longer than most of us will be alive. But how about our kids? This is a really important statistic because it tells us a lot about what contributes to your Social Security retirement benefit.
Since 76% of retirement benefits will still be payable after 2033, that means that the trust fund only accounts for a small percentage of your total benefit. So where do Social Security benefits come from? Of the total $1.24 trillion dollar expense for retirement benefits, $1.05 trillion comes from current taxation. That is made up of taxes that both you and your employer each pay (6.2% of your income) towards the program. Another $50 billion comes from the taxes you pay on your Social Security retirement benefits. $63 billion comes from interest on the trust fund assets, and the remaining approximately $70 billion comes from depleting the trust fund itself. This hopefully puts into perspective what the trust fund means to the overall program. While I don’t mean to downplay its importance, the fund could easily be made fully solvent with a few minor changes.
So how do we “fix”
Social Security?
Cut benefits. This is by far the least appealing option for retirees. Politicians would likely never let it happen because it would be nearly impossible to allow this to happen and still get reelected. I would say this is the least likely option.
Raise the retirement age. Currently, the latest you can be considered fully insured for Social Security benefits is age 67. The age has only changed from age 65 to age 67 since inception. Meanwhile, life expectancy has continued to rise. If anyone younger than say age 40 had their benefits delayed until age 70, the program would likely become solvent.
Raise or eliminate the earnings limit subject to taxation. Currently, you are no longer taxed for Social Security above $168,600 per year (indexed for inflation). This number could increase to a level that would make the fund solvent again.
Raise the 6.2% tax rate. If the 6.2% tax both you and your employer currently pay to fund Social Security were to be raised, even slightly, the shortfall could be eliminated as well.
While none of these options are particularly favorable, they are better than the reduction of benefits to current retirees. Since most of our GDP in the U.S. is based on consumer spending, the more money in the hands of retirees, the better. Clearly, it isn’t particularly hard to “fix” Social Security. The problem is coming up with the best solution (or combination of several). My point is, even if the Social Security retirement trust fund runs out of money, it likely wouldn’t be the end of the world. The government could easily maintain current benefit levels with a few minor tweaks.
All statistics sourced from SSA.gov.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. To view form CRS visit https://bit.ly/KF-Disclosures.
Eric is President and founder of Reich Asset Management, LLC. He relies on his 25 years of experience to help clients have an enjoyable retirement. He is a Certified Financial Planner™ and Certified Investment Management AnalystSM (CIMA®) and has earned his Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®) designations.
