Social Security reserves are projected to run out the year I could claim full benefits. What now?
Twenty years from now I will be 67, and able to claim full Social Security benefits, along with the rest of my peers on the leading edge of Generation X.
So it was disconcerting to read some articles earlier this month declaring that Social Security will be “bankrupt” and “out of money” 20 years from now.
Am I worried? Like many in the United States, Social Security is an important part of my retirement plan. For millions, it is the only retirement plan.
I am not worried that Social Security will run out of money. I am worried that benefits may be reduced, or the full retirement benefit age may be raised, because those are very real possibilities with big implications for retirees.
Here's the deal: Social Security checks are funded by payroll taxes. The tax that comes out of my paychecks each month helps fund the Social Security checks that my parents receive each month.
And when I'm 67, the payroll taxes paid by other people and their employers will be used to fund my Social Security checks. Social Security won't be out of money — can't be out of money — as long as there's a payroll tax, but there won't be enough money to pay full benefits unless something is done.
That is a real problem, and a serious one, but there's a big difference between getting no Social Security check and getting 77 cents on the dollar. That's the level of benefits Social Security is estimated to be able to pay in 20 years if no changes are made and reserves are exhausted.
The “bankrupt” talk deals with the Social Security system's reserves, or “trust fund.” That's the money that accumulated during all the years when payroll tax collections were greater than the benefits being paid out, including the years that followed the last Social Security reforms in the 1980s.
As the baby boom population ages, and longevity increases, the number of people collecting Social Security benefits increases to the point where payroll taxes don't cover the benefits. The “trust fund” covers the difference, until that reserve fund runs dry, which is expected to happen in 2033.
At that point, the only money to pay benefits out is the payroll tax money coming in, hence the funding problem that will arrive just as I retire.
It's a very political problem, as well as a financial one, but without changing Social Security as we know it there are really only two options: increase revenue or decrease benefits, or some combination of the two.
With no reserves, you can only pay out what you take in — that's just math.
There's been discussion about changing the way the cost-of-living adjustments are measured, which would mean smaller benefit increases. Other possibilities include raising the age for full retirement benefits again, limiting benefit payouts for high-income retirees and expanding the payroll tax.
Currently, wages up to $114,000 are subject to the payroll tax, which is a tax of 6.2 percent paid by the worker and 6.2 percent paid by the employer (or 12.4 percent paid by the self-employed). Wages above that amount are exempt from the payroll tax.
How would you fix the Social Security funding gap? You can play around with that online using a calculator the Committee for a Responsible Federal Budget developed, and see what changes you would make to bring Social Security back in balance. The website is at: crfb.org/socialsecurityreformer.
It's hard to imagine a solution being forged in Congress anytime soon, given the recent lack of compromise seen in Washington.
In the meantime, I'm feeling confident that Social Security will be there for me, but I wouldn't be surprised if I have to wait longer to get it, and get less of it.
Reach David Slade at 937-5552 or Twitter @DSladeNews.