What the Social Security Trustees’ Report Means to You

By Mitchell J. Smilowitz, CPA

The Social Security Board of Trustees recently released their 2019 Annual Report. The report shows that the Old-Age and Survivors Insurance (OASI) Trust Fund will be depleted in 2034, the same as reported in 2018.

This article explores how the depletion of the OASI may affect you.

How is Social Security Funded?

Social Security is primarily a pay-as-you-go system. The main sources of funding for Social Security benefits are FICA (Federal Insurance Contributions Act) and SECA (Self-Employed Contributions Act) payroll taxes paid by current workers and employers. In 2017, 88% of all benefits were paid through these payroll taxes.

The remaining Social Security benefits are paid through the OASI Trust Fund. Assets in the OASI Trust Fund currently total about $2.9 trillion. The assets are managed by the U.S. Treasury and invested in a variety of U.S. Treasury bonds. Based on current projections, the Social Security Trustees estimate that the OASI Trust Fund will be exhausted in 2034.

At the same time as we are drawing down the OASI Trust Fund, the demographics of the pay-as-you-go system are changing. The number of baby boomer retirees is growing faster than the number of workers paying Social Security taxes. In 2014, for instance, there were 35 retirees for every 100 workers. By 2030, that number is projected to be 45 retirees for every 100 workers. That only represents enough income from payroll taxes to pay about 80% of promised benefits.

What Can Be Done to Fix Social Security?

While there are cracks in the system, it is not broken. There are several fixes available. The solutions described below are not mutually exclusive.

  • Raise the payroll tax. Raising the FICA and SECA tax by 2.68% would eliminate the shortfall from depletion of the OASI. Because FICA taxes are shared by the employer and employee, each would see their taxes increase 1.34%.
  • Raise the ceiling on which Social Security taxes are paid. The income ceiling for Social Security taxes is currently $132,900. Eliminating the ceiling would cut the OASI deficit by about 50%.
  • Raise the full retirement age. Full retirement age currently ranges from 66 to 67 depending on when you were born. Raising full retirement age to 69 or 70 will reduce demand for Social Security.
  • Privatize Social Security. Rather than the federal government being responsible for paying your entire Social Security benefit, privatization advocates believe that some portion of your Social Security taxes should be put into a separate account that you would invest. Privatization does not, however, address the underlying demographic issues facing Social Security.
  • Reduce benefits. If none of the strategies, or combination of strategies, described above is adopted, Social Security benefits will need to be reduced. Even if the OASI Trust Fund is exhausted, benefits will continue to be paid with revenues generated through the payroll tax. As mentioned above, this would result in an estimated 20% reduction in benefits.

What Does This Mean for You?

As we have seen, it’s unlikely that Social Security will go bankrupt. Currently, nearly 9 out of every 10 dollars in benefits is paid through payroll taxes. Though that number may decline to 8 out of 10 dollars by 2034, workers will still be paying into the system.

If Social Security benefits are reduced, you will need to rely more heavily on the financial resources you’ve saved during your working years. This makes it essential that you strive to contribute 10-20% of your salary to your retirement account each year. We understand that this goal is ambitious and we are available to assist you in developing a plan that is both specific and achievable. Contact us via email or at 888-JRB-FREE (572-3733).