Social Security Annual Report – Should We Worry?

On June 5th, the Board of Trustees that oversee Social Security benefits released their annual report.  As in previous years, the report continues to show a negative trajectory of the current system.

How Does The Social Security System Work for Retirees? In general, US workers and employers pay into the Social Security system annually as part of employment taxes (6.2% for employees and an additional 6.2% for employers).   That money goes into the Social Security Trust Fund and is then used to pay retiree benefits for current retirees.

Employment Wage Taxes –> Social Security Trust Fund –> Payout to Retirees

Why Is This Year Different? For the first time since 1982, projections for 2018 show more money paid out to retirees than taken in from employment wage taxes.   The report stated at the present trajectory, the Social Security Trust Fund will be depleted in 2034.  This is the same estimated date as the 2017 Annual Report.

Potential Fixes As a country, the completely depleting the Social Security Trust Fund would cause economic and political turmoil.  Fortunately, possible fixes to the Social Security system to provide long-term stability are straightforward and include:

1. Increase the Full Retirement Age for younger participants as they had in the past (FRA was age 65, then 66 and now 67).

2. Increase the maximum income limit for SS taxes (SS taxes are only taken out on the first $118,500 of income).

3. Increase the amount of employer or employee contributions to SS.  Currently at 6.2% for each employer and employee.

4. Increase the taxability of SS benefits for people currently receiving benefits.  (even higher income individuals only have 85% of their SS income subject to taxes.)

5. Increase the number of working years that people are required to pay into the SS system (current formula is high 35 earning years adjusted for inflation)

Current or Upcoming Social Security Recipients Previous adjustments to the Social Security system have been made well in advance of a pending Trust Fund shortage and usually exempt individuals that are near retirement.  While there is no guarantee this would happen in the future, it would make sense to keep the current rules in place for individuals near retirement.

In summary, the annual report is not great news, but not nearly as dire as most news articles portray.  We are optimistic that in the coming years, the Social Security system will get minor tweaks that will keep it functioning well indefinitely.