Americans are concerned about social security.
. About Transamerica's Annual Pension Survey (44% of workers fear a reduction or elimination of social security benefits), Gallup (67% of workers worry about a "big deal" or "reasonable amount" on the social security system by March 2019) or a number of other studies , the trend is clear. Americans fear that social security will not be around (or at least will not be so generous) in the future.
As the relationship between workers and pensioners narrows – between 3.2 and 3.4 between 1974 and 2008 down to a projected 2.2 in 2035 – the program will certainly be put under additional strain and it is currently knocked out of the reserve of about 16 years.
Social Security's Board of Directors issues an annual report showing its exact prediction as to when social security runs out of money – and what happens next time.
The deficits begin within a short time
According to the manager's report, Old Age, Survivors and Disability Insurance (or OASDI) funds will start paying out more than they take next year. And by 2035, OASDI's total funds will be exhausted.
(Technically, OASI and DI are two separate programs – OASI is slated to break down its reserves by 2034, with DI hanging on until 2052. But I go down.)
So in short, Congress has about 16 years back to fix social security before it breaks.
Here is what happens if these efforts fail
If social security continues in its current bow and trustees predictions are correct when the combined OASDI funds run out of money in 2035, social security must immediately reduce the benefits , it pays. OASDI will still receive money from payroll taxes, so the Social Security Administration will be able to pay out 80% of the previously promised benefits.
Again, which differs between OASI and DI – OASI will be able to pay 77% of promised benefits when funds are exhausted in 2034, and DI could pay 91% of benefits when its reserves are cleared by 2052.
It is definitely pretty better than "Social Security folds shop and stops all benefits" (which was never a serious risk – but a persistent myth), but it's still not amazing. Consider social security representing at least half of the income of 48% of married pensioners and 69% of unmarried pensioners. It is a huge cut in their pension rights – at a time when it can be difficult to offset the deficit. (And considering how expensive health care is in retirement, it's not as though they necessarily have much wiggle room.)
So what can you do?
To ensure 75 years of solvency ahead, trustees recommend either increasing taxes or reducing benefits (or both). To solve the problem of only extra tax revenue, they recommend increasing payroll tax to 15.1% (from today 12.4%). Their benefit reduction solution is either to reduce payments by 17% for everyone (including current retirees) or by 20% for all new beneficiaries beginning in 2019. Or, again, a combination of the above.
As you can imagine, none of these solutions is terribly politically tasty. Nevertheless, there are plenty of historical precedents – in the 1983 bill, which stabilized social security, age and increased retirement age. (Increasing the retirement age serves as an advantage for future retirees, although it is not explained in that way.)
Of course, it waits longer, it makes it worse. The managers anticipate that the wait until 2035 – when the total funds run out – would necessitate an increase of 3.65 percentage points in the payroll tax (to 16.05%) or a permanent allowance of 23%.
One way to ease pain
An exciting third option – albeit with some risk – involves investing part of the social security funds in the stock market. Currently, the social security surplus of about $ 2.9 trillion is invested in US government bonds. Although definitely secure securities, they do not offer much opportunity for growth.
Boston College Retirement Center Research released a report back in 2017 that makes a compelling case for Social Security funds take on any investment risk in exchange for significantly better potential returns. The authors analyzed the stock market and concluded that the social security funds would be in better shape today if they had been invested in stocks that started in either 1997 or 1984 – despite the stock market decline in 2001 and 2008. Their simulations also predict that " Investing a portion (maximum 40%) of securities for Social Security Funds in equities will reduce the need for larger payroll tax contributions or benefit reductions. " (To be precise, 97% of their simulations showed that the Trust Fund was strengthened, provided stock investments began as after the survey's release in 2017.)
Now I prefer to invest in stocks eliminating the need for tax increases or Loss on benefits, but a reduction in the painful changes that the program must undergo would certainly be a welcome step forward.
What does this mean for you?
If you are retiring, sincerely doubt that you are getting a profit. It is far more likely that the pain will fall on non-retired generations because most people understand how terrible it would be to force a massive divide on current retirees.
If you're still working, you know that social security isn't going to go wrong and suddenly stop paying benefits – even at worst. But you can't necessarily depend on it as much as your parents' generation did – so now is the time to turboge your savings and build your retirement income base. (And consider calling your congressman if you have a strong perception of how the government should solve social security.)