When Social Security was established in 1935 by President Roosevelt, the benefits represented economic security to many in their retirement. The first monthly check was issued to Ida Mae Fuller of Ludlow, Vt. back in 1940. Her first check was $22.54, and she lived to age 100 passing away in 1975. Over her 35 years of retirement she collected over $22,000 in benefits. Today Social Security represents for many the foundation of their retirement income, but with all the rhetoric that the program is going broke, leaves some asking if their benefits will be there in the future. Let’s take a closer look.
Social Security was designed as a pay as you go system and originally there were 42 workers supporting each beneficiary. Since then that ratio has declined to where 2.8 workers support each beneficiary. But, what many don’t know is that the OASDI trust fund (Old Age, Survivor and Disability Insurance) continues to grow. Yes, the trust fund does exist (even though some have told us it’s empty) and has grown past $2.8 trillion as of the end of 2015.
Each spring the trustees of the trust fund put out a report to Congress which includes the fund’s revenue and expenditures as well as a projection of the system finances over the next 75 years to see if it is in actuarial balance. According to the trustees’ report, released in July 2017, the system collected $836 billion in payroll taxes (6.2% paid by you, 6.2% paid by your employer on all wages earned up to $118,500 in 2016. 12.4 % if you are self-employed,) $88 billion in interest on the securities in the trust fund, and $33 billion in income taxes paid on social security benefits of existing beneficiaries. Total revenue was $957 billion. The system paid out $922 billion in benefits and after administrative expenses had a net surplus of $35 billion which was added to the trust fund.
| Trust fund balance on 12/31/15: | $2.815 trillion |
|---|---|
| 2016 results | |
| Total income: | $957 billion |
| Total expenditures: | $922 billion |
| Net increase in assets: | $ 35 billion |
| Trust fund balance on 12/31/16: | $2.85 trillion |
Now there are those out there claiming that the government has “spent” all of the Social Security surplus. By law, all of the OASDI trust fund assets are invested in U.S. Treasury securities. These are the same kind of Treasury securities owned by individuals, pension funds and foreign governments. The only difference in the Treasuries held by the trust fund and individual investors is that the securities held in the trust fund are redeemable on demand at full value and aren’t subject to price changes before maturity. The naysayers argue that since the government issues Treasury securities to fund the U.S. debt the trust fund holds nothing but “IOUs”.
According to the trustees’ report, income will exceed costs until 2020. Beginning is 2020, expenses will start to exceed revenues, and the trust fund will gradually be liquidated in order to pay promised benefits. It’s estimated that by 2034, all the securities will have been liquidated and trust fund reserves will be exhausted. At that time, revenues will be sufficient to pay about 79% of scheduled benefits. So if Congress doesn’t act between now and then benefits will be reduced but the Social Security system is not in imminent danger.
Proposed Changes
Every year there are several proposal and bills filed in Congress proposing changes to the Social Security system which can be seen on Social Security’s website Most of the proposals involve raising taxes, lowering benefits, increasing the normal retirement age, or a combination of many options.
- Increased Payroll Taxes
The Social Security trustees’ noted in their latest report that it would take a payroll tax increase of 2.58% to bring the program back into actuarial balance. Another consideration would be to increase the amount of income subject to payroll taxes, currently $127,500 in 2017. - Cutting Benefits
In lieu of raising the payroll tax, the system could remain solvent if benefits were cut about 16% – an option that, while viable, would be extremely unpopular. - Raising the normal retirement age
As a result of amendments made it 1983, full retirement age was increased to age 66 for beneficiaries born between 1943 and 1954. And for those born 1960 or later their full retirement age is 67. As life expectancy increases this consideration might be the most liked or the easiest to get through congress. A study done by the Academy of Actuaries indicates that if full retirement age was increased to age 70 the Social Security system would be solvent for the next 75 years.
Steven C. Johnson, ChFC, a financial advisor with Finivi, has helped many clients over the past 27 years maximize their Social Security retirement income benefits. Steve is a well sought out speaker for numerous private and public corporations, educational institutions, and social and fraternal organizations on the topics of Social Security and Retirement Income Planning. Need help maximizing your Social Security retirement income? You can schedule a complementary consultation by clicking here.
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