Social Security — How Secure Is It?

If one was to read only the headlines of articles written to describe the future of our Social Security system, one could be excused for being alarmed. Some people, especially younger people when polled, even believe that they will never see a penny from Social Security when they retire someday. The topic of Social Security’s long term viability becomes major news every year when the administrators publish their latest projections.

According to the most recent forecast, the current surplus, referred to as the Social Security Trust Fund, is expected to be depleted in 2033. The trust fund was built up over time because for many years the money collected from payroll taxes exceeded the money paid out in benefits. However, the money collected is now falling short of the money paid out. The money in the trust fund is being used to make up for that shortfall.

The reason usually cited for the current shortfall is the falling ratio of workers to retirees. However, in a report of the Advisory Council on Social Security, the actuaries pointed out that the worker to retiree ratio was not the primary cause. The shortfall is also the result of higher disability take-up, slower wage growth, a growing share of earnings above the taxable wage base, and a growing share of compensation going toward health insurance and other untaxed benefits.

Once the trust fund is depleted, the program will be able to pay out only about 77% of scheduled benefits. So we can put to rest the idea that there will be no money to pay benefits at all. There will still be workers paying into the system, just not enough to pay 100% of scheduled benefits. The system does not operate like a typical corporate pension plan. It is primarily a pay-as-you-go system in which there is a monetary transfer from current workers to current retirees. The first recipients paid into the system for only five years before receiving benefits.

We have been here before. In fact, the Social Security surplus was on the verge of depletion when, in 1981, President Reagan established a bipartisan commission chaired by Alan Greenspan to study the options and make recommendations. Hanging over the process was the future stress on the system presented by the eventual retirement of the Baby Boom generation. Among the commission’s recommendations adopted by Congress were to gradually increase the full retirement age from 65 to 67, accelerate the payroll tax rate increases that had been previously scheduled, initiate partial taxation of Social Security benefits on higher income recipients, and bring newly-hired federal employees into the system.

Not infrequently, the ability of Democrats and Republicans to come together in the 1980s and address a future crisis is referred to as a model of bipartisanship that seems impossible to replicate in the current political environment. Instead, it has become a political football. It’s clear that people (voters) do not want to see their benefits cut, nor do they want to pay more in taxes. No wonder that Social Security has been called the “third rail” of politics. However, a recent survey conducted by the Program for Public Consultation at the University of Maryland provides some evidence that Americans are more receptive to small increases in both the payroll tax and the retirement age in order to preserve the system than politicians seem to think.

The Social Security actuaries have projected that an increase in revenues equal to less than 1% of GDP will be sufficient to cover promised benefits over the 75-year planning period. Certainly, raising the payroll tax rate is one way to raise revenues. The percent of wages subject to the payroll tax reached its current level of 12.4% in 1990. Half of that is paid by employees and half by employers, with the self-employed paying the full 12.4%. Raising it to 16%, which would bring the employee portion up from 6.2% to 8% of wages, would solve most of the problem, and a smaller increase would be a partial fix. A strong argument against increasing it is that it would hurt lower-income workers, many of whom already are subject to a higher average tax rate than many higher income workers, when payroll taxes are added to income taxes.

Another proposal is to raise the wage base to which the rates are applied or even eliminate the cap altogether. In 2023 that base is $160,200, which increases each year as salaries rise. A variation of that is to leave it where it is, but then re-apply the rate to wages above a certain level, such as $400,000, as proposed by President Biden, and perhaps phase it out again at a still-higher level. One rationale for expanding the wage base is that the total share of wages escaping the tax has risen from 10% in the 1980s to 20% today.

Some proposed solutions involve reducing benefits. One is to again raise the full retirement age beyond 67, which will apply to people born in 1960 or later. To ease the impact on workers who need to retire earlier, the early retirement age, at which lower payments are received, could be maintained at age 62. Another proposal is to lower the cost-of-living adjustment that is applied each year. The impact on retirees may not be severe initially but over time it would take its toll on lower income recipients. Benefits for higher income recipients could be reduced indirectly by expanding the proportion of benefits that is subject to income taxation, currently no more than 85%. That would bring additional revenue into the system.

Some argue that no change be made to the payroll tax rate or the wage base and that that general tax revenues should fill the gap. They point out that it would be no different than how we pay for other federal programs and that the cost is only a very small percent of the nation’s GDP. But that would entail shifting funds from other programs, raising income taxes, or increasing the federal debt. It also would involve changing the law, which requires the program to be self-funding.

Other ideas revolve around increasing the number of workers paying into the system. For example, the workforce could be increased and the ratio of workers to retirees raised by admitting more working-age immigrants, especially if the current worker shortage persists. Or newly-hired state and local employees could be brought into the system, as was done in 1984 with federal employees, which would bring more funds in at a time when they are needed. While many state and local employees already participate in Social Security, there are still some public employees at the state and local level who do not.

There was a time not too long ago that retirement planners looked at the “three-legged stool” with the three legs being a company pension, Social Security, and personal savings. Company pensions have almost become extinct, leaving workers to bear the burden of funding and managing their employer-sponsored retirement plans, such as 401(k) and 403(b) plans, if they even participate at all. That makes people more dependent on the other two legs of the stool, especially Social Security, given the meager personal savings that many people retire with. Congress can only procrastinate for so long, and may continue to do so until the program is on the brink, as it was in the 1980s. But the importance of Social Security income is greater than ever.

If you have questions about Social Security or any other topics, please reach us at (833) 888-0534 x2 or info@westbranchcapital.com.

The views and information contained in this article and on this website are those of West Branch Capital LLC and are provided for general information. The information herein should not serve as the sole determining factor for making legal, tax, or investment decisions. All information is obtained from sources believed to be reliable, but West Branch Capital LLC does not guarantee its reliability. West Branch Capital LLC is not an attorney, accountant or actuary and does not provide legal, tax, accounting or actuarial advice.