Why Social Security isn’t ‘bankrupt’
Will Social Security even exist when you retire? Can you count on it to cover your needs?
Folks have asked that for years, most recently because of the 2017 Social Security Trustees Report. It reckons the Old Age, Survivors and Disability Insurance trust funds runs out by 2034.
The Social Security Administration recently announced 2018 beneficiaries will get their largest cost-of-living boost in six years — all of 2%. Yikes!
Scare stories abound. Most are overblown. Social Security won’t collapse. Those retiring soon really needn’t fret. But younger folks likely face Scroogelike benefits in the future.
But most hand-wringers misunderstand how these funds work. They aren’t like IRA and 401(k) accounts, which are completely gone once “depleted.”
“Funds” don’t even pay most Social Security benefits. Most payouts come from current workers’ taxes. Simply said, Social Security is pay-as-you-go redistribution, not the “lock box” of Sat
urday Night Live fame. The so-called “trusts” are mere accounting entries.
The trustees report projects taxes will still cover 77% of benefits after the trust funds are depleted. Take that with a big grain of salt, considering how bad long-term forecasts always are. But you get the point. The ballyhooed funding issue concerns roughly 25% of all estimated benefits, after 2034. That’s a lot less scary than most imagine from headlines screaming about Social Security “going bankrupt.”
Then, too, nothing in this realm is carved in stone. Congress hates touching Social Security. But they can. And they have. If Social Security budgeting problems seem urgent, lawmakers can hike taxes or tweak benefits. They did in 1977, after a botched 1972 cost-of-living formula brought overly generous benefits, straining politicians’ sensitivities (hard as that is to do).
“Patching” the cost-of-living formula created large future benefit cuts. But it preserved then-current payouts nicely. A 1983 “patch” hiked payroll taxes, cut benefits and delayed cost-of-living increases — to pave over another payout pothole — delaying political funding neurosis.
Don’t even imagine that, after the trust funds are depleted, laws somehow prohibit Social Security from paying benefits beyond those covered by existing dedicated tax income. These laws are subject to change. Congress suspended this very requirement before 1983’s reforms. When political pressure gets high, Congress will change the rules again — to let Social Security fund benefits flow via other federal taxes and borrowing.
Yes, Social Security changes will require some folks to pay more for other folks. History and politics suggest this burden likely falls on young folks — Baby Boomers’ revenge on Millennials. Retirees vote more regularly and predictably than 20-somethings. Always remember: Politicians’ first fundamental goal is winning re-election. Immediately cutting current retirees’ benefits is a surefire path to election failure.
This is why, in 1977, only those below retirement age got stuck with the stingier new cost-of-living formula. Those over 65 kept the more-generous benefits. In 1983, when Congress began taxing Social Security benefits, they limited it to folks with other substantial income and didn’t index trigger thresholds to inflation. So the tax hit future inflationimpaired participants hardest.
If you’re 65 years or older, the risk of big benefit cuts is very low. Be thankful politicians covet your vote. Similarly so for 55-year-olds planning to retire at 65. Lawmakers are such a paranoid pack. Just in case, planning for a 10%-15% benefit cut might be prudent. But you can compensate by taking advantage of the 401(k) catch-up contribution allowances. Those closer to age 50 have higher risk. They hit retirement age in the 2030s, when reforms might be implemented. If you’re 35 to 45 years old, maybe plan for a 25% cut.
Younger still? Save more. Social Security will never take care of you. Never. Max your 401(k) and keep it in stocks.
Most hand-wringers misunderstand how these funds work.