Are Your Social Security Benefits Secure?

Are Your Social Security Benefits Secure?

Many have expressed concerns about whether Social Security can continue to provide benefits. It’s clear that the system needs revamping, but, rest assured, it is not in danger of shutting down. Social Security is too deeply embedded in the American culture and economy for that to be a possibility.

First, a little background: the Social Security Act was signed into law by President Franklin D. Roosevelt in August 1935, during the Great Depression. The goal of the Social Security Administration was to provide income for retirees aged 65 and older, and support for low income individuals, as well as disabled, blind, and widows or widowers with minor children. Keep in mind that in 1935, the retiree population was about 7 million, and average life expectancy was 61. 

Today, average life expectancy in the U.S. is closer to 80—76 for men and 81 for women—and there are approximately 43 million people drawing retirement income from Social Security. Since the Administration was born, the benefits have been updated and extended many times, including cost of living pay increases to keep up with inflation, retiree health insurance (now known as Medicare), raising the full retirement age from age 65 to 67, and making Social Security income benefits taxable, to name just a few changes. In 1983, Congress pushed for a major overhaul and passed legislation to increase Social Security payroll taxes, in anticipation of the barrage of retiring Baby Boomers 30 years later. Since then, not only has the tax rate for Social Security increased, but the maximum taxable income has increased as well. Keep in mind that payroll taxes are the Administration's largest source of revenue, and increase every year. For example, in 2017, Social Security taxes were assessed on the first $127,200; in 2018 that will go up to $128,400.

For many years, the Social Security Administration took in more tax revenue than the cost of benefits. With the excess revenue, the Administration created two trusts: one for retirement and the other for disability/survivor benefits, and the funds were invested in U.S. Treasury Bonds. Economists and politicians understood that with the coming retirement of Baby Boomers, planning ahead was critical to circumvent a perilous threat to the U.S. economy.

So now that Baby Boomers have begun to retire, what is happening? As expected, Social Security benefits paid out have begun to exceed tax revenue, and as a result the Administration's trust assets are being liquidated—which was planned for. At the current pace, if there is no reform, trust assets are projected to be depleted by 2035. That doesn’t mean that Social Security benefits will stop, because tax revenues will continue to flow in—but they may only cover three-fourths of the retirement benefits. If you have reviewed your Social Security benefits statement recently, you may have seen a note to that effect.

The bottom line is that Social Security benefits are not going away. But if nothing happens—which is not likely—benefits could be adjusted. One more thing to consider: 30 years ago, the Baby Boomer generation was the largest population sector. But now Millennials far outnumber Baby Boomers. This shift could translate into a larger work force, a greater tax base, and consequently more Social Security tax revenue.

Sources: Social Security and Medicare Tax Rates; Social Security Fact Sheets; 5 Social Security Changes to Expect in 2018; History of Social Security Act