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Is Social Security Really Going Broke?

social security

You may have heard various media reports that Social Security is “going broke.” If so, you might be wondering whether or not this is really true.

The simple answer is no. But to understand why this is so and why it has become a common misconception, it helps to better understand the Social Security trust funds and how they actually work.

Two Social Security Trust Funds

No, that isn’t a typo in the previous sentence — there are two separate Social Security trust funds. Both of them are financial accounts in the U.S. Treasury.

The first is the one that most people think of when they are talking about Social Security: the Old-Age and Survivors Insurance (OASI) trust fund. This fund pays benefits to qualifying retirees and workers who have died. The second is the Disability Insurance (DI) trust fund. This fund pays benefits to qualified individuals, along with their spouses and children, who can’t work because they have suffered a disability.

Social Security payroll taxes — also known as Federal Insurance Contributions Act or FICA taxes — and any other income are deposited into these accounts, and all benefits and program administration costs are paid out of them. Money held in the trust funds is invested in U.S. Treasury securities, which are backed by “the full faith and credit of the United States government.”

The U.S. government has never defaulted on its financial obligations. Therefore, U.S. Treasury securities are considered to be among the safest investments in the world.

Trust Fund Surpluses and Shortfalls

Social Security is a “pay as you go” program. In other words, current benefits are paid out of FICA taxes collected from employees who are currently paying them. In recent years, Social Security has collected more in FICA taxes than it paid out in benefits. This has resulted in trust fund surpluses of about $2.9 trillion.

But this changed starting last year when Social Security paid out more in benefits than it collected in FICA taxes. This shortfall will be covered by dipping into the trust fund reserves, which are currently projected to only be sufficient to pay full Social Security benefits until 2034.

If no government action is taken before then, it’s projected that Social Security income will only be sufficient to pay three-quarters of the benefits currently promised to recipients. But this is far from “going broke.”

What Can Be Done?

Several different proposals are being studied by policymakers in order to make up the projected shortfall and enable payment of full Social Security benefits in the future. For example:

  • The maximum amount of earnings subject to Social Security tax could be increased. Currently, the Maximum Taxable Earnings for Social Security is $132,900. Earnings above this amount aren’t subject to FICA taxes.
  • Full retirement age (or FRA) — the age at which retirees are eligible to receive full Social Security benefits — could be raised. Currently, FRA is 67 for those born in 1960 or later and between 65 and 67 for those born between 1938 and 1959.
  • Benefits for future retirees could be reduced. One way this could be achieved is by escalating benefits based on increases in consumer prices instead of increases in wages.
  • Cost-of-living adjustments (or COLAs) could be reduced in the future for all Social Security beneficiaries.

The Social Security Administration has even made it possible for anyone who is concerned about the future of Social Security to make special donations to the Social Security trust funds. Find out more by visiting the Social Security donation website.

System is Facing Challenges

There’s no question that the Social Security system as it’s currently operating is facing challenges. But dealing with projected future funding shortfalls is not the same thing as “going broke” — in fact, it’s far from it.

Please give us a call if you have more questions about Social Security as it relates to your personal retirement plans.

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