Taylor Schulte

The Future of Social Security

Published about 1 month ago • 3 min read

Hi Reader,

Social Security is a touchy subject.

Over the years, I've observed the attitude toward Social Security becoming increasingly negative due to its perceived insolvency.

Due to this perception, it's not uncommon for retirement savers to question if (or how) they should include it in their future planning.

While the overall health of the Social Security program is not great, it's still better than many people realize.

In today's email, I want to share some important updates about the program to help you make important planning decisions.

The State of Social Security

Much of the misunderstanding of Social Security stems from the media's focus on the shrinking “Social Security Trust Fund.”

The issue with the trust fund is less about the people managing it and more about demographics and longevity.

As baby boomers retire and lifespans have increased, benefits owed to retirees now exceed payroll tax revenues.

Until recently, Social Security paid out monthly benefits using payroll tax revenue and interest earned on the trust fund.

But that changed in 2021, when Social Security was forced to dip into the trust fund's principal to meet the shortfall.

This is expected to continue until 2033, at which point the trust fund will be depleted.

This is the point where most of the misunderstanding occurs.

According to a recent article from the Center for Retirement Research:

“The depletion of the trust fund does not mean that the trust fund (OASI) is bankrupt. Payroll tax revenues keep rolling in and can cover 77 percent of currently legislated benefits initially, declining to 71 percent by the end of the projection period.”

As implied, it’s commonly overlooked that Social Security has operated primarily as a pay-as-you-go system throughout its history.

In 2024, for example, employers and employees will each pay 6.2% of wages to Social Security (up to the taxable maximum of $168,600).

Self-employed individuals are on the hook for the full 12.4%.

Once Social Security collects those taxes, they are almost exclusively used to pay monthly benefits to qualified recipients.

While the situation isn’t great as it stands right now, it is fixable.

Here's what might be required to close the funding gap:

“Social Security’s long-run deficit is projected to equal 3.61 percent of covered payroll earnings. That figure means that if payroll taxes were raised immediately by 3.61 percentage points – about 1.8 percentage points each for the employee and the employer – the government could pay scheduled benefits through 2097, with a one-year reserve at the end.”
~Center for Retirement Research

So, with what could be considered minor changes, promised benefits could be paid through 2097...

...which is certainly past the life expectancy of anyone age 30 or older today.

It's important to note that the costs to fix this deficit grow with each passing year of congressional inaction.

That said, the potential solution above does not involve making any other changes, which seems unlikely given how they approached the 1983 Social Security reform.

Bottom Line

It seems likely that they would take a multifaceted approach to "fixing" Social Security.

For example, in addition to raising payroll tax percentages, they might also raise the level of earnings subject to payroll taxes AND increase the eligible retirement ages for future retirees.

Finding that balance will obviously require compromise from Washington, D.C., which is no small task.

Even if they don’t make any changes to the system, the Social Security Administration estimates that they will have enough to pay full benefits until 2033.

Beyond that, they could provide benefits at a 77% level thanks to payroll tax revenue from American workers and employers.

That's obviously not ideal, but it's a long way from the $0 that many people assume to be the case.

Additional Resources:

My goal today was not to minimize the significance of the issue but to show that the situation is manageable compared to the doomsday scenario most people hear about.

Hit reply to this email with any questions or comments.

Stay wealthy,

Taylor Schulte, CFP®

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Taylor Schulte

Retirement and tax planning plain English.

I'm the host of the Stay Wealthy Retirement Show and founder of Define Financial, an award-winning retirement and tax planning firm. When I’m not helping people lower their tax bill, you can find me traveling with my wife and kids, searching for the next best carne asada burrito, or trying to master Adam Scott’s golf swing.

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