One of the most common questions that I am asked is “Will Social Security be around when I want to take it?”. My answer: it has to be – to some extent. Too many people rely solely on only Social Security, and completely eliminating it would be devastating to many individuals which would cause a ripple effect on other government social programs.

Problems Facing Social Security:

There is no denying that the Social Security system is in financial trouble. We have all heard politicians talk about “fixing” Social Security. Currently, the Social Security Trust Fund balance is approximately $2.9 trillion, but a combination of factors will begin dismantling the balance, and it is projected that the Social Security Trust Fund will run out of money in 2035. Let us dive into each of these factors:

• One of the issues that Social Security is running into is the slow down of birth rates in the United States. While the reduction of birth rates in the U.S. has not been as large as some countries in Europe or Japan, it has still slowed down tremendously.
  
  For example, individuals born in 1954 are turning 66 this year, which is their “Normal Retirement Age” for Social Security benefits. The birth rate in 1954 was 24 births per 1,000 people. This birth rate might seem low, but to put it in context, the birth rate in 2019 was 11.97 births per 1,000 people – half of what it was in 1954.
  
  

Why this is important is less people are paying into Social Security, while more people are beginning to receive benefits. It is expected that the worker-to-beneficiary ratio will fall from 2.8-to-1 to as low as 2.1-to-1 between 2015 and 2035.

• People are living longer – When Social Security first started the average life expectancy was 17 years lower than it is today. The Normal Retirement Age for Social Security benefits has only increased 2 years (from age 65 to age 67) during that same period. This in turn has resulted in individuals collecting benefits much longer than originally anticipated.
  
  The average Social Security benefit received is approximately $1,500/month. The life expectancy of a 67-year-old male is current about 16 years, and that of a 67-year-old female is almost 19 years. With that being said, the average total lifetime benefit received (without inflation adjustments) would be approximately $288,000 for males and $342,000 for females.
  
  The average amount paid into Social Security each year is $3,045 per person. The average total amount paid into Social Security if an individual were to work 49 years (age 18-67) would be $149,205 – much less than the average benefit received.

Potential Solutions for Social Security:

So, what can be done to combat people living longer and the birth rate declining substantially? There have been several proposed solutions that have been tossed around to “fix” the Social Security system:

• An immediate increase in the Social Security Payroll Tax  of 3.1%.
  • The current rate is 12.4% split between employees and employers (6.2% each).
  • The proposed rate is 15.5% (7.75% each)
    1. This increase equates to approximately $1,550 of additional Social Security taxes paid for every $100,000 of earned income per worker per year.
       
• An immediate 19% across-the-board reduction in benefits.
  • Ex: If you were receiving $2,000/month you would now receive $1,620/month.
    
    
• Pushing back the “Normal Retirement Age” from 67 to an unknown age.
  • In 1983 the legislation passed to increase the Normal Retirement Age from 65 to 67 gradually over 23 years (if you were born between 1937-1960).
  • The bipartisan Simpson-Bowles Plan has proposed raising the Social Security Normal Retirement Age to 69 by 2075.
    
    
• Lump-sum payout at full retirement age instead of receiving monthly benefits.
  • Example: If your estimated benefit is $300,000 over your lifetime, instead of receiving monthly checks you would receive for example $150,000 today to invest/spend and you would receive no further benefit.

Based on today’s calculations, the Social Security Trust Fund will run out of money in 2035. If the government cannot come to a solution and if no action is taken until 2035, the increase in Social Security Payroll Tax would have to be 4.1% (increase to a 16.5% total tax) instead of the 3.1% increase today. Alternatively, benefits would have to be cut by 25% instead of the current estimate of 19%. The longer we wait, the more drastic the action will have to be.

The Unknown:

COVID-19’s Effect on the Social Security System is the big question mark right now. The projections that the Social Security Trust Fund will run out of money by 2035 did not account for a pandemic such as COVID occurring.

With the record number of unemployment claims in 2020, the amount of people paying into Social Security has drastically dropped which will “hurt” the worker-to-beneficiary ratio. On the other side, the pandemic has been more fatal to older individuals who are more likely to be collecting Social Security, which should “help” the worker-to-beneficiary ratio. The effects of COVID will not be known for quite some time, but the longer the pandemic lingers the more detrimental it will be to the longevity of the Social Security Trust Fund.

The Outcome:

Most likely we will see a combination of the above solutions to “fix” Social Security. An increased tax for workers combined with decreased benefits for retirees, while gradually increasing the Normal Retirement Age is the most likely course of action.  

Our recommendation is if you are under 40 years old, exclude Social Security from your retirement projections because there is quite some time between now and when you will be collecting benefits. The future structure of the Social Security system will absolutely look different than how it does now, and you want to make sure that you will be in a financially sound position even if Social Security were to completely vanish (which we don’t believe will ever happen). If you structure your retirement to not depend on Social Security, any benefit that you do end up receiving would be icing on the cake. We advise that you sit down with your Family Wealth Advisor to review your scenario to ensure that you are on track to plan for the potential shortfall of not being able to rely on Social Security in retirement.

Sources:

Gregg Brant, CFP®, APMA®, MBA

Family Wealth Advisor | Contributor

Gregg is a financial planner who is passionate about helping first responders and their families navigate their financial lives with confidence. Having a spouse who is a professor in the State University System, Gregg has worked with the Florida Retirement System first-hand for his own personal financial planning.

Now Gregg is on a mission to take this knowledge and disseminate it to the people who deserve it most; our first responders.