What if we were to ask you, “Which government program helps support almost 70 million Americans, and last year kept 15 million seniors from living in poverty?” Chances are you could guess the answer in one try: Social Security. Yet in spite of the fact that Social Security has been providing benefits to seniors and some disabled people since 1935, many in the U.S. are convinced that the program is doomed to disappear.
This recent article from the GoBankingRates website helps to set the record straight. In it, John Csizar, an experienced financial planner and investment adviser, argues that, yes, Social Security does face some challenges going forward – but despite public misconceptions (especially among younger Americans), it’s not going to vanish any time in the foreseeable future. We need to fix what’s broken, Csizar writes, but let’s not lose faith in a benefit program that he terms “ingenious.”
Many Americans Have Lost Faith in Social Security
“Increasing numbers of Americans are losing faith in Social Security,” Csizar begins. He quotes a 2021 survey from Nationwide Insurance which reveals that 71 percent of all respondents indicated that they feel Social Security will run out during their lifetimes. “For Generation X survey participants,” he adds, “that number jumped to a whopping 83 percent.”
Millennial respondents are especially gloomy: nearly half (47 percent) of the survey respondents are convinced that “they will not get a dime of the Social Security benefits they have earned.”
“Responses from this study and others clearly show fear among Americans that Social Security is on the brink of vanishing,” says the GoBankingRates analysis. “But the reality is that Social Security is a self-sustaining system, and it isn’t going anywhere.” With that reassurance, Csizar explains how Social Security really operates, and he takes a look at the news headlines that, as he puts it, “may be instilling these fears across America.”
An Insolvent Social Security Trust Fund
As Csizar writes, it’s pretty simple to pinpoint the root cause of all that negative perception. “Oftentimes, irrational fears come from a kernel of truth,” says Csizar, “and worries about Social Security going away are no different.” Every year, he explains, the Social Security Board of Trustees publishes a report on the status of the program, and lately the outlook has been bleak. According to the 2021 Social Security Trustees Report, the trust fund, officially called the Old Age Survivors Insurance Trust Fund, will be drained to zero sometime in 2033.
“It’s easy to see how many people could read that statement and think that Social Security is going away in 2033, if not even sooner,” Csizar writes. “But the way Social Security actually operates, that’s just not going to happen.”
How Social Security Funding Actually Works
Csizar is actually pretty bullish about the underlying health of the program. “On the face of it, Social Security is an ingenious system,” he states. “The program is funded by payroll taxes paid by workers and employers, with that money then used to pay benefits to current retirees.” At present, 6.2 percent of the gross wages of most workers (matched by employers) helps pay for Social Security and another 1.45 percent goes to Medicare. “The 6.2 percent taken out for Social Security ends up in the hands of retirees, just like your Social Security payout will someday come from the paychecks of future workers,” Csizar adds.
(By the way, he writes, if you’ve ever wondered what the “FICA” deduction on your paycheck was, it stands for “Federal Insurance Contributions Act.” That’s Social Security.)
Back in 1935 when Social Security was launched, there were far more workers paying into Social Security than there were retirees drawing benefits. As a result, even as recently as the end of 2020, the trust fund surplus had swelled to $2.9 trillion! “But,” says the article, “as the proportion of retirees to workers has grown, thanks in large part to increased life expectancy, program income (in the form of payroll taxes) hasn’t been able to keep up with program expenses (in the form of benefits paid). To make up for this shortfall, the Social Security Administration has been forced to draw down the Trust Fund surplus, to the point where it will be depleted by 2033.”
Why Social Security Isn’t Going Away
That sounds pretty grim, Csizar acknowledges, but it’s not the end of Social Security as we know it. “Even if the Social Security Trust Fund is completely depleted in 2033, Social Security isn’t going away,” he asserts. “This is because it is primarily funded by payroll taxes on workers. The Social Security Trust Fund is simply a surplus collected from earlier years, not the primary funding source of the program.”
The Social Security Trustees Report explains that, if nothing changes, benefits will continue to be paid in 2034 – but only at 78 percent of currently scheduled benefits. “While this is far from ideal, receiving 78 percent of your expected benefits is a far cry from losing everything,” says the article. That’s why Csizar considers some of the doom and gloom badly overstated.
Governmental Proposals To “Fix” Social Security
As we’ve shared before here on the AgingOptions Blog, politicians may be frustrating but they aren’t dumb – and they know the public will demand a fix. “The U.S. government fully understands that any reduction in benefits is unpalatable to Social Security beneficiaries,” writes Csizar, “so various proposals to shore up the program are already floating about Capitol Hill.” Nevertheless, although finding a fix is critical, the wheels of government grind slowly.
“It may take some time for Congress to reach an agreement on how to proceed,” says the GoBankingRates article. “Various proposals have come in and out of favor over the years, and while some may have more momentum now, there’s no telling exactly how the situation will be resolved.” Currently there are these leading ideas when it comes to Social Security reform:
- Increasing the Social Security wage base (currently no income over $147,000 is taxed for Social Security)
- Increasing the retirement age (presently the maximum full retirement age is 67)
- Increasing the income thresholds so more Social Security benefits are taxed
- Increasing the payroll tax rate (currently 6.2 percent, matched by your employer)
“Increasing the wage base, payroll tax rate and income thresholds for Social Security taxation would all raise additional revenue,” Csizar explains, “while increasing the retirement age would attack the issue from the other side by reducing total payouts. Which, if any, of these proposals will ultimately see the light of day is unknown at this time, but some type of change is likely.”
The Bottom Line: Don’t Give Up on Social Security
The important point here is that this critical program is surprisingly vibrant, but it does need repair. “Losing faith in Social Security is counterproductive because the program is not going away,” the article concludes. “Although changes will likely be made, and you should consider a potential benefit reduction in your retirement planning, as long as there are American workers, Social Security will continue to pay out the bulk of its scheduled benefits.”
As always, we’ll keep an eye out for further developments to this important story.
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(originally reported at www.gobankingrates.com)