Planning Discussions - Social Security - Part 2 of 2
Wealth & Pension Services Group
William Kring, CFP®, AIF - Chief Investment Officer
With an estimated 10,000 Americans expected to retire each day over the next 19 years, it’s no wonder that Social Security has become such a hot topic. Through this two part series, we seek to address some common questions surrounding Social Security benefits, and provide an update on the Social Security Administration’s current financial status.
The 2014 Social Security Trustees Report: What Does the Future Hold?
Every year, the Trustees of the Social Security Trust Funds release a report to Congress on the current financial condition and projected financial outlook of the program. This year's report, released on July 28, contains valuable information about the health of Social Security that may help you understand how your Social Security benefits might be affected.
What are the Social Security Trust Funds?
The Social Security program consists of two parts. Retired workers, their families, and survivors of workers receive monthly benefits under the Old-Age and Survivors Insurance (OASI) program; disabled workers and their families receive monthly benefits under the Disability Insurance (DI) program. The combined programs are deferred to as OASDI. Each program has a financial account (a trust fund) that holds the Social Security payroll taxes that are collected to pay Social Security benefits. Other income (reimbursements from the General Fund of the Treasury and income tax revenue from benefit taxation) is also deposited in these accounts. Money that is not needed in the current year to pay benefits and administrative costs is invested (by law) in special Treasury bonds that are guaranteed by the U.S. government and earn interest. As a result, the Social Security Trust Funds have built up reserves that can be used to cover benefit obligations if payroll tax income is insufficient to pay full benefits.
What are some highlights from this year's report?
This year's Trustees report projects that the OASI Trust Fund and the DI Trust Fund will have sufficient reserves to pay full benefits on a timely basis until 2034 and 2016, respectively. The combined trust fund reserves (OASDI) are still increasing and will continue to do so through 2019. Beginning in 2020, annual costs will exceed total income, and the U.S. Treasury will need to redeem trust fund asset reserves. The combined trust fund reserves will be depleted in 2033 if Congress does not act before then. This is the same year projected in last year's report.
Once the combined trust fund reserves are depleted, payroll tax revenue alone should still be sufficient to pay about 77% of scheduled benefits. This means that 20 years from now, if no changes are made, beneficiaries may receive a benefit that is about 23% less than expected. However, because the DI Trust Fund reserve is projected to be depleted in two years, legislative action is needed as soon as possible. Once the reserve is depleted, income to the fund will be sufficient to pay only 81% of DI benefits. You can view the 2014 OASDI Trustees Report at www.ssa.gov.
Why is Social Security facing financial challenges?
Fewer workers are paying into the system, so payroll tax income is decreasing. When there are fewer payroll taxes coming into the system each year than benefits paid out, trust fund reserve assets have to be spent to make up the difference. The strain on the trust funds is worsening as large numbers of baby boomers reach retirement age and Americans live longer.
What is being done to address the financial challenges Social Security faces?
For years, the Trustees have been urging Congress to address the financial challenges in the near future, so that solutions will be less drastic and may be implemented gradually, lessening the impact on the public. As the conclusion to this year's report states, "The Trustees recommend that lawmakers address the projected trust fund shortfalls in a timely way in order to phase in necessary changes gradually and give workers and beneficiaries time to adjust to them. Implementing changes soon would allow more generations to share in the needed revenue increases or reductions in scheduled benefits. Social Security will play a critical role in the lives of 59 million beneficiaries and 165 million covered workers and their families in 2014. With informed discussion, creative thinking, and timely legislative action, Social Security can continue to protect future generations." Action needs to be taken very soon to address the DI program's reserve depletion. According to this year's report, in the short term, lawmakers may reallocate the payroll tax rate between OASI and DI (as they did in 1994). However, this may only serve to delay DI and OASI reforms. Members of Congress and the President support longer-term efforts to reform Social Security, but progress on the issue has been slow.
Some long-term reform proposals on the table are:
- Raising the current Social Security payroll tax rate (according to this year's report, an immediate and permanent payroll tax increase of 2.83 percentage points would be necessary to address the revenue shortfall)
- Raising the ceiling on wages currently subject to Social Security payroll taxes ($117,000 in 2014)
- Raising the full retirement age beyond the currently scheduled age of 67 (for anyone born in 1960 or later)
- Reducing future benefits, especially for wealthier beneficiaries
- Changing the benefit formula that is used to calculate benefits
- Changing how the annual cost-of-living adjustment for benefits is calculated
What can you do in the meantime?
The financial outlook for Social Security depends on a number of demographic and economic assumptions that can change over time, so any action that might be taken and who might be affected are still unclear. But no matter what the future holds for Social Security, your financial future is still in your hands.
- Follow the news to learn about new developments or proposed legislation to reform Social Security
- Understand your own benefits, and what you'll receive from Social Security based on current law
- Consider various income scenarios when planning for retirement
- Focus on saving as much for retirement as possible
If we can help your or someone you care about with social security, please let us know.
Source: Washington Post, Forefield