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WHEN SOME FOLKS MAKE the all-important Social Security claiming decision, one worry outweighs all others. Their big fear: The program’s funding will “run out” in a few years and therefore they “can’t depend on Social Security being around,” so the smart strategy is to claim benefits at 62, the youngest possible age.
This is not a big worry of mine—largely because Social Security won’t “go broke.” What’s happening to the program’s funding is that, in the past, annual revenues flowing into Social Security from taxes on workers exceeded the cost of annual benefits that the program paid. Excess funds were used to purchase government bonds. As the population ages, and the percentage of retired workers rises, the revenue from current workers will drop below the benefits being paid to retirees. The shortfall at first will be made up by selling the government bonds the program has purchased in the past.
Social Security’s excess funds, called the Social Security trust funds, are projected to be depleted sometime between 2033 and 2035. In the absence of changes to the law, Social Security’s revenue will then be limited to the contributions of active workers. At that point, the stream of contributions to Social Security from current workers will still cover some 75% of benefits. Consequently, while the trust funds could be exhausted, the system can’t go entirely broke unless every single person in the country stops working.
There are several steps that policy makers might take to close the funding gap, and some of these have been done in the past: raise the Social Security withholding rate on all workers, delay the future full retirement age for current workers, or increase the income subject to Social Security payroll taxes. One thing that policy makers have never done is decrease the benefits for people already receiving them.
Even if you believe policy makers will dither and do nothing, it’s likely that your benefits would be around 75% of what current calculations suggest. If you aren’t counting on Social Security because of its funding problems, you could eliminate the risk of lower benefits by purchasing a deferred income annuity that would provide 25% of your Social Security benefit at whatever time in the future you think the system will “go broke.”
Paradoxically, it’s likely that you would find that the cheapest such annuity is simply to delay claiming Social Security itself by a little more than three years. After all, your benefit will increase by around 7% to 8% for each year you delay, and thus a three-year delay would give your benefit roughly a 25% boost. From a risk mitigation point of view, for those who can afford to wait, the possibility that future benefits will be dramatically reduced is not an argument for claiming Social Security early. Rather, it’s an argument for delaying benefits.
Finally an article that acknowledges that at least some of us are concerned about the long term assurance that we will receive our full SS benefits. I am quite confident that I am not the only one who is not basing their retirement financial plan on the assumption that we will. “Wouldn’t be prudent.”
“Even if you believe policy makers will dither and do nothing, it’s likely that your benefits would be around 75% of what current calculations suggest. If you aren’t counting on Social Security because of its funding problems, you could eliminate the risk of lower benefits by purchasing a deferred income annuity that would provide 25% of your Social Security benefit at whatever time in the future you think the system will “go broke.” ”
So thank you, Mr. Johnson, for offering up a valid strategy for mitigation of that risk.
We need more people paying taxes including SS tax.
We’re not having enough Babies to repopulate ourselves.
‘If we don’t have the will to stop the millions of illegals coming over the border let’s a least issue them SS Numbers so they can pay taxes.
They actually want to work , unlike our own citizens.
Just pull the cap off the deduction as was done with Medicare, since the well-off can handle it much better than the lower income folks. Oops, can’t do that, can we?
These so-called bonds were just a gimmick. What really happened is that these funds were spent by Congress for other things than social security benefits that would normally be paid for from general revenues. The money was spent, it wasn’t piled up to be used later.
Starting in 2021 the amount of money collected from social security taxes was less than benefits paid, and this flow reversed. General tax revenues and borrowing are now being used to cover the short fall in social security taxes collect each year in order to pay benefits.
I agree that the trust funds are just an accounting gimmick that did nothing to “save” Social Security: The government is simply transferring money from one pocket to another. Still, I fear that the depletion of the trust funds could — with an emphasis on “could” — be the device used to cut Social Security benefits. I think the chances of it happening are minimal. Still, in the early 2030s, we could have an even more poisonous political atmosphere and hardliners may allow benefits to be cut. I strongly suspect those responsible would be tossed out at the next election and the cuts immediately reversed. But the intervening sturm und drang, and the suffering inflicted on low-income seniors, will be painful to watch.
I recommend John Rekenthaler’s recent three-part column at Morningstar.com, where he simply explains the mystery of Social Security accounting. The trust fund concept can be very confusing and is often used to scare seniors. Better yet, Rekenthaler shows that the tools to “fix” it are well within reach without cuts to benefits.
https://www.morningstar.com/articles/1139948/the-two-great-myths-of-social-security-reform
I don’t think the trust was ever intended to save SS but to reinforce the idea that SS taxes would be used for SS benefits and as FDR said (paraphrase) keep it out of the hands of politicians. The SS law of course is very much in the hands of politicians.
Nevertheless, the Trust is our measure of the solvency of that program – the going in and coming out. Unlike Part B Medicare where premiums are inadequate but just shored up by general revenue.
We could solve the problem simply by raising and maintaining on an ongoing basis the taxes to cover all program costs. Then we wouldn’t need a trust and we could just borrow from China…🤑
That simply is not true.
Just as if you bought savings bonds, the government takes the proceeds and uses it to operate and pays you interest.
The SS Trust bought special bonds and the government took the proceeds and used them just as it does with all bonds it sells and pays the Trust interest. The Trust is now gradually redeeming bonds to pay benefits. Yes, it’s actually a matter of accounting but the result is the same.
Would you rather have the trust at risk and the government having three trillion invested in the stock market? Think of the possible consequences.
The money we pay into SS is just a tax like any tax and has nothing to do with the benefits provided to us as individuals under the SS law.
General tax revenue is not being used to pay benefits.
Ah, yeah it is. And you spent the rest of your post explaining just how it works.
Ignoring the smoke and mirrors of the “trust fund” accounting it is really pretty simple. Look at the Federal Government as a whole.
When Social Security taxes exceed social security expenditures for any given year the excess funds raised by the Social Security taxes are used to pay for non-social security expenditures. Thus, the Federal Government can meet its non-social security obligations with less general taxes and less public debt issuance.
When Social Security taxes don’t meet social security expenditures for any given year, then the shortfall has to come from general tax revenues or public debt issuance. That is where the funds to “redeem” the special bonds come from. Thus, the Federal Government must raise enough money via general taxes and public debt issuance to cover all non-social security expenditures and transfer enough money to Social Security to cover the shortfall.
The “trust fund” is just an accounting method to keep track of the net effect of these flows of money from social security taxes to general expenditures and vice versa. It is not some pile of money preserved for future use.
Where did this comment come from? I didn’t say anything about this idea in my post and I have never, anywhere, advocated this approach. Why don’t you focus on what I DID post instead of trying to ascribe some other ideas to me. That behavior is beneath you.
You mentioned the money was not piled up and used later. Where would it be piled up to be used later and receive income, i.e. invested?
Yes, the trust is accounting, but from the very beginning it was intended to give Americans confidence in the SS program and what was being taken from their pay for the future. It has a purpose and it’s not a gimmick.
There is enough confusion about SS, telling people what they see as their future security is just a gimmick is not helpful.
This discussion would never take place if Congress over the years had followed the trustee urging to make adjustments to revenue or benefits and keep it all in balance.
I agree the trust fund has a purpose and that that purpose is to give the public confidence in the SS program by creating a belief that excess funds are saved for the future.
Unfortunately, if you follow the money, it is very clear that this is a false promise as these excess funds are not preserved in any meaningful fashion but were spent as soon as they are collected. Is not something that attracts attention but has no real value a gimmick? The Cambridge English dictionary defines it as so.
Sometimes the truth hurts, but it’s better than being deceived by a head fake.
I believe you are correct, in the sense that the Social Security trust fund is really an accounting function. The government in general spends funds as they come in, and “promises” to fund Social Security in the future to repay the excess funds that Social Security generated in the past.
Not clearing these accounts by “returning” these funds would be a serious breach of credit, though, and at least so far policy makers have found it more convenient to add to the deficit than either fail to pay its debts or fix the underlying funding shortfall of revenue in the current Social Security system.
Why won’t they? It is the path of least resistance. Politically it may be easiest to drop the “trust fund” gimmick and just acknowledge that general revenues will be used to cover any shortfall in Social Security taxes.
Thanks for this post.
Delaying Social Security also means having built-in inflation protection. A comparable deferred annuity would need this feature, no doubt costing more.
Congress could also make up a SS shortfall from other sources. While this option doesn’t get attention now, I think it would get serious consideration if a reduction in benefits was imminent.
One other challenge with predicting when SS could go down is that their assumptions about labor force size are too high. See the WaPost article https://www.washingtonpost.com/opinions/2023/03/21/covid-baby-boom-economy/
Good summary. While money going into the trust were excess at the time, we should not make the mistake of labeling the trust as excess funds. Some advocates refer to the trust that way saying the “excess or surplus” should be used to improve benefits.
Social Security has trillions of dollars in accrued liabilities that have yet to be funded for workers who have and are accruing benefits.
Many state’s pension funds are the same condition as Richard mentions above
That’s very true – over promising and underfunding.