Imagine going to your doctor for your annual check-up. After running some routine tests, he or she tells you that you have a relatively insignificant infection that will have absolutely no impact on your health for the next 16 years. While your disease will never kill you, if you don’t make some healthy changes in your lifestyle, it will limit your activities a bit.
Your first reaction might be, “Oh, no! I’ve come down with the same disease my grandfather had!”
But then you might realize, “Wait a minute. I’ve got 16 years before I feel any effect from this. More importantly, I can completely prevent this disease by slightly altering my diet and increasing the exercise I get. Whew!”
That’s essentially the situation that Social Security is in.
The 2017 Trustees Report
By law, every year the Social Security Trustees present Congress with a report on the outlook for the program’s financing, both near term as well as 75 years into the future. This entails making assumptions and projections about dozens of factors—some of which might surprise you.
Such as: What will be the birth rate in each of the next 75 years? How fast will wages grow in each of the next 75 years? How many people will qualify for disability benefits in each of the next 75 years? How many people will be employed in each of the next 75 years? What will be the legal immigration rate in each of the next 75 years? What will interest rates be in each of the next 75 years? Etc., etc.
In other words, the outlook for Social Security’s funding is based upon educated guesstimates. In the words of the great sage Yogi Berra, “It’s tough to make predictions. Especially about the future.”
It doesn’t help that the long-term solvency of Social Security is expressed in terms used by insurance professionals. (Although this should not be surprising as Social Security is social insurance.)
The problem is that most of us are not actuaries! So when you hear, “The Trustees project that the combined trust funds will be in depleted in 2034” and that “the actuarial deficit … is 2.83% of taxable payroll, up from 2.66% projected in last year’s report,” you tend to focus on the words you are familiar with: “depleted,” “deficit” and “up.”
This leads to the conclusion that the program will run out of money in 17 years. Those close to retirement age might also conclude, “I’m filing for benefits as soon as possible so that I can at least get something back before Social Security goes broke!”
Take a Deeeep Breath
To paraphrase Mark Twain, another great American philosopher, “Reports of [Social Security’s] death are greatly exaggerated.”
Consider this: Will Americans (generally speaking) still have jobs in 2034 and beyond? Of course! Which means that employers will still be required to deduct payroll tax and send it to the Treasury Department which will then credit Social Security’s account. So what does “actuarial deficit” refer to?
In a nutshell, it’s the size of the shortfall—the difference between the Social Security tax being collected and the amount of benefits the program expects to have to pay out. In other words, it’s how much the current Social Security tax rate of 12.4% would have to be increased in order to pay all retirees their expected benefits through 2092:
Current Tax Rate: 12.40%
+Actuarial Deficit: +2.83%
But let’s break this down a little further. The payroll tax is split, with employer and employee each contributing half, for a current contribution of 6.2%. The additional 2.83% (the deficit) would also be evenly divided, with employer and employees paying 1.4% more.
To put this in another way:
If you and your employer each were to kick in $14 more for every $1,000 you make (up to the annual cutoff amount*) everyone gets their expected Social Security benefit for the next 75 years!
Now, I recognize talking about paying more in taxes is likely to elicit some ire in certain circles. But in my humble opinion, it seems like a relatively painless solution. I personally have found that when I broach the subject with people, they are relieved that this is all it would take to shore up Social Security!
That said, it is highly unlikely that Social Security’s long-term shortfall will be corrected simply by raising the payroll tax rate. I’ve outlined one idea to consider, but studies by various think tanks suggest a variety of ways Social Security finances could be brought into alignment by slightly tweaking a number of factors.
Back to the Trustees Report
Do yourself a favor and go to the source and not someone else’s interpretation of it (mine included.)
While the entire Trustees report runs 269 pages, you’ll get the important highlights from in the summary released issued by Social Security here: https://www.ssa.gov/oact/trsum/
There you will learn that last year the trust fund for retirement benefits and the trust fund for disability benefits—known as the combined Old-Age, Survivors and Disability Insurance (OASDI) Trust Funds—increased by $35 billion!
You will also find out that Social Security will be able to fully pay all benefits until 2034—17 years from now! To think about this another way, we have almost two decades to come up with a solution that addresses the problem. Naturally, like a leak in your roof, the longer you wait, the harder it gets.
In my next article, I’ll shed light on some other misconceptions about Social Security.
Learn more about developing a strategy to fund your own retirement: www.franklintempleton.com/whatsnext.
And, ask your professional advisor to run your personal scenario though the independent third-party LifeYield Social Security Optimizer tool, which can help you and your advisor consider your personal goals and circumstances, and begin to determine when the right time to start taking Social Security benefits might be.
Gail Buckner’s comments, opinions and analyses are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Opinions and analyses are rendered as of the date of the posting and may change without notice.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
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Important Legal Information
All financial decisions and investments involve risk, including possible loss of principal.
The information (including tools) contained herein is general and educational in nature and should not be considered or relied upon as legal, tax, or investment advice or recommendations, or as a substitute for legal or tax counsel. It is not intended to serve as the primary basis for your investment, tax or retirement planning purposes, and should not be used as the final determinant on how and when to claim Social Security benefits, which can be a complex and personal decision. FTI is not responsible for content on the Social Security Administration’s website. Federal and state laws and regulations are complex and subject to change, which can materially impact your results. Always consult your own independent financial professional, attorney or tax advisor for advice regarding your specific goals and individual situation.