Social Security… or Social Insecurity

We’ve all heard the dire Social Security predictions:

“Social Security and Medicare are Slowly Dying” (USA Today, 6/13/18)

“Social Security Is Running Dry” (Forbes, 6/18/18)

“Social Security is Going Broke” (Fox News, 8/15/18)

Vermont Free Press

Social Security was established on August 14, 1935, signed into law by Franklin Delano Roosevelt.  It followed a number of unsuccessful local and regional programs that were all designed to address the poverty experienced by many senior citizens.  At the time, more than 70% of senior citizens were considered poor.  In the words of President Roosevelt in a radio address, “The Social Security Act offers to all our citizens a workable and working method of meeting urgent pressing needs and of forestalling future need.” 1

Described by some as an informal contract between the young and old, contributions to the Social Security Trust Fund are made by the vast majority of working Americans, so that benefits can be paid to retired Americans.  Under the 1935 law, monthly benefits were to begin in 1940, with the period of 1937 – 1940 used to both build up the Trust Fund and to provide a minimum period for participation.  Before 1940, Social Security paid benefits in the form of a single, lump sum.  The first payment was made to a retired Cleveland motorman named Ernest Ackerman, who retired one day after the Social Security program began.  He received a lump sum payment of 17 cents.1

In 1945, approximately 42 workers contributed to the Trust Fund for every retiree.  Currently, the ratio is less than three to one.  Making matters worse, baby boomers will soon be retiring in record numbers, and Americans are living longer.  As a result, social security benefits paid by the Trust Fund exceeded contributions this year, for the first time since 1982.  According to current projections, the Trust Fund will be depleted in late 2034.1

Will all payments stop at that time?  Many Americans think so.  In a 2015 Gallop poll, 51% of non-retired Americans said they doubted that the system will be able to pay them a benefit when they retire.  The headlines have hit home.  Sensationalism sells!  But headlines can also mislead.

It is true that under current law, full benefits cannot be paid when Trust Fund reserves are depleted.  But tax revenues will continue.  Tax revenues are currently projected to be sufficient to support expenditures at a level of 77% of scheduled benefits in 2034, declining to 72% of scheduled benefits in 2088. 

This appears to be the worst-case scenario for the next 70 years – certainly not ideal, but far from a total loss of benefits.

We believe that at some point, our government will be forced to act.  There are a number of possible approaches, but they boil down to three:

  • Raise taxes
  • Reduce benefits
  • Some combination of the two

Here is a (somewhat surprising) summary of some potential changes, presented to provide a sense of the magnitude of change required:

  • Raise the Retirement Age – The original Social Security retirement age was 65.  In 1983, it was raised to age 67 (for those born in 1960 or later).  Gradually increasing the age to 70 between 2023 and 2069 would eliminate approximately 25% of the funding shortfall.2
  • Change the Cost of Living Adjustment – Using a slower growth measure of the inflation calculator would eliminate approximately 20% of the funding shortfall.2
  • Means-test – Approximately 20% of the funding shortfall could be eliminated by reducing benefits for those with (non-Social Security) income from $55k to $110k for individuals, and $110k to $165k for couples, and then eliminating benefits beyond these amounts.2
  • Reduce or eliminate the tax cap – Requiring high earners (and their employers) to pay the social security tax on all earnings (not just the first $128,400) would eliminate nearly 75% of the funding shortfall.2
  • Add 2.84% to the current payroll tax rate – The Trust Fund is currently funded by a 12.40% payroll tax.  Most workers pay half this amount (6.2% up to a maximum of $128,400 of earned income), which is then matched by the employer.  The Social Security Administration projects that an increase from 12.40% to 15.24% would fully fund the Trust for 75 years.3 

Today’s hyper-partisan political environment does not bode well for the compromises needed to solve the Social Security funding problem.  But our government can only kick the can down the road for so long.  We believe that at some point, there will be legislation to address the funding shortfall.  And we believe that future legislation is more likely to protect benefits than to slash them.  As James P. Hoffa, President of the Teamsters Union (and yes, the son of the infamous Jimmy Hoffa) once said, “No politician was ever elected to Congress because he or she promised to cut Social Security, Medicare or Medicaid.”

1Social Security Administration

2U.S. News and World Report –

3401(k) Specialist Magazine, Issue 3, 2018

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete. Any opinions are those of Steven Criscuolo and not necessarily those of Raymond James.

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