Social Security (Trust Fund) Update…
Is Reform Possible?
The Social Security program provides income to millions of Americans for Retirement, Disability Income and Survivor Benefits. Each year the Trustees Report the solvency by issuing the OASDI Trust Fund results. (OASDI) stands for Old Age, Survivors and Disability Income benefits.
With so many people currently collecting Social Security Benefits, (the number increases daily), and with the number of Baby Boomers moving swiftly into ages to begin collecting their retirement benefits, it is imperative our system remains solvent to be able to pay out promised benefits.
When the Trustees make their annual projections, they use 3 cost scenarios; a low cost, a high cost and an intermediate cost scenario. The intermediate cost scenario is what most people are familiar, as that is what’s used in the financial industry and the news media. Prior to this years’ report, under the high cost scenario, the Trust Fund runs out in 2030. Under the low cost scenario, the Trust Fund lasts for another 75 years and with the intermediate cost scenario, the Trust Fund runs out in year 2033 which is the year cited in most articles.
The projection of the Trust Fund works as follows: Within the next couple of years, there will be insufficient “income” (from payroll taxes, taxes on benefits & Trust Fund interest) to pay out 100% of promised benefits. At that time, the Trust Fund will be reduced by the annual short-fall until the Trust Fund falls to zero. Last year’s report suggested at the time of depletion, there would only be enough income coming into the system in 2034 to pay 77% of future benefits. This year’s report is a slight improvement, as it is projected the income will now provide 79% instead of 77% of future income.
Trust Fund 2018
Total income into the Social Security System totaled $1.003 trillion in 2018. The expenses totaled $1.000 trillion, slightly increasing the Trust Fund by $3 billion to a total of $2.895 trillion.
The income includes payroll taxes, income from income tax on Social Security Benefits and Interest Income earned on the Trust Fund. The expenses include Benefit payments and administrative expenses. Under the intermediate cost scenario, the Trust Fund will be depleted at the end of year 2033. In 2034, the projection is there will be income coming into the system through payroll taxes that will pay approximately 79% of projected benefit payments.
What will the government do with this projected shortfall? They certainly have had and have sufficient time to correct this situation and provide peace of mind to all Americans.
The last time Social Security was reformed in the mid 1980’s when the system was facing a short-fall. Alan Greenspan (a familiar name) was in charge of a task force to determine the best way to solve the short-fall. The solution was implemented to gradually increase the retirement age to be able to receive 100% of your Full Social Security Retirement Age Benefit from 65, gradually to Age 67. Under the current system, if you’re born in 1960 or later, your full retirement age for Social Security is age 67.
Social Security 2100 Act (Possible Reform?)
There is a bill in Congress called the Social Security, H.R. 1902, Social Security 2100 Act. This is a revival of a prior bill and it may be gaining a little momentum. This bill would raise both benefits and increase taxes in an effort to restore solvency over the next 75 years.
There are several changes this bill would make, however the main changes are as follows:
- Base the annual COLA (Cost of Living Adjustment) on the Consumer Price Index for the Elderly (CPI-E) rather than CPI-W, which is based on worker wage increases. This would increase the COLA by an average of .2 percentage points per year. This appears to be positive because retirees experience different costs than people raising families.
- Replace the income thresholds for taxation of benefits to $50K for single filers and $100K for joint filers. The current levels that begin to tax Social Security are 25K for single filers and 32K for joint filers, so on the surface this seems to be an improvement.
- Apply the OASDI payroll tax to earnings above $400,000 and will not be indexed by inflation. Currently the maximum wages that can have the tax applied is $132,900 in 2019 and that figure is indexed by inflation. For example, if you have income of $500,000, you will pay social security tax on the first $132,900 and then start to pay again on your income above $400,000. Eventually, projected to be in 2048, the current $132,900 will increase to be equal to the $400,000. The taxes that are paid over the $400,000 will have additional limited crediting for one’s monthly benefits going forward.
- Increase the combined OASDI payroll tax rate by .1 per year (.05 percentage point each for employers and employees) until it reaches 14.8% in 2043. For years 2043 and later, the OASDI payroll tax would be 7.4% each for employers and employees (14.8% total), up from 6.2% each (12.4% total) under current law. As I certainly realize some pain needs to take place for a positive change, being self-employed and an employer I pay as an employer and employee for myself and I pay as the employer for my staff. So far in my career I’ve paid just under $300,000 in total Social Security taxes, not including Medicare for just my own benefits, not any staff members. I very much want to see the program solvent!!
- Combine the Old Age and Survivor Trust Fund and the Disability Trust Fund into one.
It is estimated with the above changes and a few others not listed, the program would be solvent throughout the 75-year projection period and would be able to pay 100% of scheduled benefits on timely bases for the foreseeable future.
Will this bill become law? Time will tell, as always. There are many creative solutions being discussed. Let’s hope our Politicians begin to take them seriously before the short-fall becomes too dire!
Why Is This Important?
If you are wealthy enough to never need any of your Social Security Retirement Benefit, this probably is not very important. Otherwise, you want to have confidence your benefit will be 100% available when its your time to collect. Equally important is to make sure you thoroughly understand how your optional claiming strategies will impact your retirement.
As an Advisor who specializes in Retirement Income Planning, I see first-hand, on a daily basis, how important Social Security Benefits are to your retirement. Years ago, I believed the political party that is responsible for reforming the system would have eggs thrown on their faces. I’ve now come full circle and believe the party or people responsible for reforming Social Security, in a positive manner, will receive significant “Kudos”.
Let’s hope this gets done soon, in a positive manner!
How about Medicare Solvency? That’s another topic for an upcoming blog! Stay Tuned!