Insecurity About Social Security

On August 14, 1935, President Franklin D. Roosevelt signed the Social Security Act of 1935 into law. This landmark piece of legislation established the Social Security program. The program has undergone changes throughout the years, but its goal has remained the same – to provide Americans with protection against the loss of earnings due to retirement, death, or disability. Although the Social Security program has achieved this goal for the past 85 years, some individuals have begun to question the program’s long-term stability.

How is the Social Security program funded? Payroll taxes have been the primary source of funds for the Social Security program since 1937. Currently, 12.4% of an individual’s wage income up to $137,700 is paid into the Social Security program. Half of this amount is covered by the employee, while the other half is covered by the employer. In addition to payroll taxes, the Social Security program relies on two secondary funding sources – (i) taxes paid by certain retirees on current benefits and (ii) interest paid by the federal government on loans taken from the program. All of the program’s revenue is held in a trust fund. Since the program’s inception, more than $8.7 trillion has been paid into the trust fund and more than $7.4 trillion has been paid out in benefits. Unused revenue remains in the trust fund and is available for future benefit payments if needed.

Is the Social Security program solvent? According to the Employee Benefit Research Institute’s 2020 Retirement Confidence Survey Summary Report, only 68% of retirees and 48% of workers feel confident that Social Security will continue to provide benefits of at least equal value to those received by retirees today. Are the fears of those individuals who lack confidence in the Social Security program justified? Let’s consider the facts. As mentioned, the benefits paid to retirees are largely funded by payroll taxes collected from those currently employed. In 1945, there were 41.9 workers paying payroll taxes for every Social Security beneficiary. In 2020, there are just 2.8 workers paying payroll taxes for every Social Security beneficiary. This significant decrease in the worker-to-beneficiary ratio has caused tremendous strain on the program. It is due in large part to the increasing number of baby boomers reaching retirement age. In its 2020 annual report to Congress, the Social Security Board of Trustees announced that in 2021, the total annual cost of the Social Security program will exceed its total annual income for the first time since 1982. While the program can rely on its asset reserves to cover costs in the short term, such reserves are projected to be depleted by 2035. Although Social Security benefits would not be eliminated at that time, the program would only be able to pay 79% of its scheduled benefits relying on the funding sources noted above.

What steps can be taken to ensure the long-term viability of the program? In order to ensure the long-term viability of the Social Security program, Congress must draft legislation that will increase the program’s revenue and/or reduce its cost. Fortunately, legislators have plenty of proposals to consider. One common proposal involves raising the maximum amount of wage income subject to the payroll tax. Currently, this threshold is set at $137,700. Some analysts have even suggested eliminating this earnings cap entirely so that all wage income is subject to payroll taxes. Another popular proposal would push back the Full Retirement Age. Retirees seeking to receive 100% of their benefits would be forced to wait a bit longer. Those unwilling to wait until their new Full Retirement Age would face a significant reduction in benefits.

Although policymakers continue to debate specific proposals, there is a growing consensus that action must be taken to stabilize the Social Security program for future retirees.

Article provided by Bryan A. Ruder, CFP?, AAMS?, AIF?, AWMA?, CRPC?, MPAS? , Associate Vice President/Investments, Stifel, Nicolaus & Company, Incorporated, Member SIPC and New York Stock Exchange, who can be contacted in the Evansville office at (812) 475-9353 or [email protected]