“While the state of Social Security’s trust fund reserves often receive significant media attention, in reality, the bulk of funding for paying out Social Security benefits comes from Federal Insurance Contributions Act (FICA) taxes, more commonly know as payroll taxes.” – Adam Van Densen, Kitces.com
Standup comedians tend to take normal life circumstances like parking the car or airport bathrooms and turn them into something comical. The results are mixed – Seinfeld built a whole show around essentially “nothing.” To date, I’ve never heard one use Social Security as a topic du jour if they are looking for laughs. “A guy walks into a bar with a poodle under one arm and a Social Security Check under the other.” Definitely not funny..
The funny/irony/interesting thing about Social Security is the confusion about its overall status as a benefit, how it is funded and the benefits runway that awaits younger generations. We hear politicians and the media use different dates and different amounts to either promote the health of the system or sound the alarm on its future demise.
What I hope to do over the next few weeks is update everyone on where the system stands today, examine the future of Social Security and the explore some options for our clients and friends based on the potential outcomes. Let’s start with a snapshot of the system in 2024.
The Federal Old-Age and Survivors Insurance/Federal Disability Insurance (OASDI) Trust Funds publish annual reports on their heath and ability to repay benefits over time. In 2024 the estimates proclaim that they will deplete all the reserves in the fund by 2033 (9 years from now). This does not mean that SSI benefits will become unavailable, and the reason is that current income earners are paying retiree’s benefits via their payroll taxes. It’s the ultimate pay-as-you-go system.
The reason the ‘Trust Fund’ itself has money available is because payroll taxes exceeded benefits in earlier years. However, that paradigm has shifted and the fund has now run a deficit since 2010. That is the contributing factor to it running dry in the 2030’s.
The current estimates state that the system can pay 83% of scheduled benefits in 2035 when it is theoretically depleted. “Which means, simply put, even if nothing is done to address the situation, the ‘worst case’ scenario (under intermediate economic assumptions affecting the system’s future health) is that almost 4/5 of Social Security benefits would still be paid for the rest of the century!” – Kitces.com. You read that correctly – the end of the century.
So, the alarm bells being raised or the eye roll’s that I receive from younger generations about the future of their benefits may be a bit hyperbolic. However, problems exist, and you will not find any politicians touting their new plan to pay 83% of their constituent’s benefits. Several policy options are being examined along with a combination of solutions that may impact claiming ages, amounts paid into the existing system and changing the base benefit amounts for higher incomes.
Stay tuned for Part II where we will dive into some of these policy options. We will also be examining what this all means for both existing and future retiree’s. I’ll keep looking for any good Social Security jokes – if you find one please send it my way!
