“If we command our wealth, we shall be rich and free. If our wealth commands us, we are poor indeed.”
–Edmund Burke
PARADIGM SHIFT
The Future of Social Security — Can We Count On It?
Social Security has come under renewed scrutiny in recent days.
The clear and obvious problem is that future obligations exceed future tax revenue—and the fund for making up that difference is about to run out!
According to the 2024 Annual Report of the Board of Trustees which oversees Social Security, the OASI (Old Age and Survivors Insurance) Trust Fund is estimated to deplete by the year 2035.
And the only lasting way to pay such benefits is through the special tax called FICA, covering Social Security and Medicare.
There are three main avenues for the US to address this upcoming challenge:
- Higher growth in the economy could increase FICA tax payments.
- Raising the FICA taxes could increase FICA tax payments.
- Changing the benefit structure of Social Security could balance incoming taxes with outgoing payments.
What this doesn’t mean, though, is that Social Security simply disappears. There’s little need to worry that it won’t be there at all for future generations. Depleting the trust fund doesn’t stop the tax revenue from continuing to come in.
Absent one of the first two options, the third option means that changes will need to be made to the program.
The Board of Trustees looks at a 75-year projection for Social Security and makes the following conclusions.
In order for retirees to receive 100% of their stated Social Security from now through the year 2098, the FICA tax revenue would need to increase.
Presently, the FICA tax specifically designated for Social Security is 12.4%. Half is paid by the employer and half by the employee. Self-employed individuals pay the full 12.4%. This tax rate would need to rise by an estimated range of 3.33%-4.02% (depending on the timing), bringing the total to 15.73%-16.42%.
For employees, that would mean an increase in Social Security FICA tax payments from 6.2% to something around 8%.
Considering an average US salary of $60,000, that’s an extra tax of around $1,000 or more.
✂️ If taxes are not increased, the other option is a reduction in benefits.
The estimated benefits for future Social Security payments are about 75.4% of what they would have been in the past. This is part of a larger range depending on many factors, particularly when the issue is addressed seriously and how. This also assumes, as is typical in reform proposals, that current recipients continue receiving promised benefits.
And, though not yet proposed, there could be some sort of a phase-in program of reduced benefits based on age when the change is implemented, to give individuals time to plan and prepare.
There is also the possible choice of simply making retirees wait longer to receive their full promised payment. Perhaps they could still receive 75% of the agreed payment at age 67 but could receive the full amount if they waited to begin payments until age 70.
Of course, the Board also points out that there could be a compromise among these alternatives.
The good news for children born today? A projected stabilization between incoming tax revenue and outgoing payments is projected to happen around 2080.
Now this assumes many things about population growth, improved birth rate, productivity and longevity, but it’s worth noting that things aren’t inevitably doomed to get worse and worse.
Until then, though, we the people will have to shoulder some additional responsibility to make up the difference.
Here are a few things that, in the long-term, have the potential to help:
Save more money (of course)
Encourage a family-oriented culture (improve the birthrate)
️ Elect politicians who are serious about ensuring Social Security’s solvency (not just delaying the inevitable)
Improve worker productivity through such tools as AI (and educate ourselves on the best way to use these new tools)
Some combination of all four!
In the end, financial literacy and preparation becomes more important now than ever before.
While we can likely count on some Social Security, we will likely need to accept greater responsibility than the past generation when planning for a comfortable retirement when the time comes.