Since the 1930s, Social Security has grown into one of America’s most popular social welfare programs and has acted as a safety net for many current retirees. While it has been a cornerstone of the American retirement, experts have warned about the looming cash flow crisis the program will run into. The 2020 Trustees Report touches on a net cash outflow problem starting as early as 2021, along with the issue of exhausted cash reserves by 2035. These issues have many Americans wondering if Social Security will be around for them, and we are here to shed some light on the issues and answer this questions with the data we have now.
The Bad News
- The Social Security cash reserves are held in trust funds. These trusts have around $2.9 trillion in reserves at the end of 2019. However, benefit payments are increasingly outgrowing income due to demographic and actuarial trends.
- Life expectancy is going up (good news for people, but bad news for Social Security). In the 1930s, the average life expectancy was around 60 years, while today it’s around 78 years. While life expectancy rose over this time, the full retirement age for Social Security did not grow proportionally, meaning more payments going out than expected.
- Birthrates in the U.S. have fallen, which creates fewer workers paying into Social Security while the number of retirees will continue to grow. Social Security was designed to be funded by current worker contributions, meaning current retirees benefits are coming from those still working.
- There has been and continues to be political inaction to resolve the soon cash flow problems. Trustees have warned of this issue for nearly 35 years, but Congress has been hesitant to respond with different beliefs.
- By law, the majority of assets in the trust funds must consist of U.S. Treasury assets. While interest rates have been declining, the trusts expected returns have gone down. Lower than expected returns coupled with current pandemic problems may continue to intensify the issue as unemployment will continue to reduce contributions.
The Good News
- While the cash reserves are estimated to be depleted by 2035 as of now, this isn’t nearly as worrisome as it may seem. The majority of money for benefit payouts doesn’t come from the trust funds. The majority of money paid to retirees comes from taxes paid by those currently working, while the trust fund pays the deficit to get you the whole amount. While there is indisputably an issue that could lead to future problems, projected payroll taxes are estimated to cover around 75 percent of promised benefits. This means in a worst-case scenario, those retiring around 2035 would still get around 75 percent of projected benefits they would expect.
- While not many enjoy higher taxes, there are possible solutions around this option. Tax increases would raise the amount of cash inflow and could either come from higher payroll taxes, raising the payroll tax cap (currently $137,700, anything made above that does not get taxed for the purpose of Social Security) or taxing those who currently receive benefits.
- Reducing cash flow going out, meaning lower benefits, is also an option to continue the program funding. Options here include raising the full retirement age which is currently 67 for anyone born in 1960 or later, or moving the program to a form of means-testing. This would mean for those who have saved more, have pensions, etc. would receive less in Social Security.
Now you can breathe a sigh of relief knowing there are policies that can be changed to save Social Security, or worse case scenario as of now you will get around 75 percent of your original benefit. Not that a lesser benefit is ideal, but you can assume because of how many people rely and look favorably on Social Security it will be there when you retire. Social Security was only designed to replace around 40 percent of pre-retirement income, since you can safely know a good portion will still be there doesn’t mean you shouldn’t have other investments to pull from. Call us to make an appointment today to review your specific Social Security benefit, how to maximize that benefit and how different investments may help supplement that benefit.
At First National Bank and Trust, we IGNITE PROSPERITY® by helping our clients do more with their money. Whether it’s saving a little extra cash each month or accomplishing a long-term strategy, our goal is to help you transform your financial life. Call and schedule an appointment today, one of our team members would love to help you do more with your money at FNBT. For more information visit firstnbtc.com or call 217-935-2148. #igniteprosperity