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The Real State of the Social Security Program

Come 2024, the Social Security system will be in its 89th year of operation, and in many ways, the key federal retirement income insurance program is showing both its age and its continuing importance to the U.S. retirement landscape.

On the one hand, there is the program’s shaky financial future to consider, with an insolvency date for the big OASI retirement trust fund now projected sometime in the mid-2030s. Without changes, benefits could be cut 20% to 30%, or more, for the typical retiree.

On the other hand, the choice about claiming Social Security is rightly viewed as the single most important financial decision the typical middle income and even mass-affluent American makes in their lifetime. Social Security, as the adage goes, is the all-important third leg of the retirement stool — helping to keep older Americans upright alongside their private personal savings and their employer-sponsored pensions.

It is troubling, then, to consider that Social Security is seemingly faltering at the same time that defined benefit pensions are going the way of the dinosaur. It all raises the question: If Social Security fails in the 2030s and employers are no longer in the game of providing pensions, will individual Americans be left entirely on their own to prepare for retirement? 

It’s a scary prospect to be sure, but as the veritable Social Security guru Marcia Mantell recently told me, it’s also “never going to happen.”

“Social Security will be there for Americans when they retire, including the Gen Xers and millennials,” Mantell said. “It may look a little different from today’s benefits. Maybe benefits will be a little lower, or they will be means tested in new ways, but the program is too important and it has too much history to imagine that it will ever simply be allowed to disappear.”

Instead, Mantell and others say their real fear is that Americans may soon come to see Social Security as a problem that is too big to fix — either for fiscal or political reasons — when the reality is that solutions abound and there is far more public consensus than disagreement about what needs to be done.

A Crash Course in Social Security’s Funding Woes

With respect to Social Security’s solvency, one can get a good lay of the land from an analysis published earlier this year by the Committee for a Responsible Federal Budget, based on underlying data from both the Congressional Budget Office and the Social Security trustees.

As the CRFB report highlights, Social Security faces a budget shortfall equal to 4.9% of taxable payroll over the next 75 years. This shortfall is equal to 1.7% of GDP over that time, and the CBO’s projections posit that restoring solvency would require the equivalent of reducing projected benefits immediately and permanently by 26% or increasing dedicated taxes by 40%.

By 2096, according to the CBO data, the cash shortfall will rise to 7.4% of taxable payroll, the equivalent of 2.5% of GDP.

In addition to its solvency projections, the CRFB analysis also offers a blueprint for restoring Social Security’s long-term financial health, pointing to a variety of possible tax increases or benefit formula adjustments that could be undertaken, either alone or in concert, to put Social Security on a sounder financial footing.

Experts like Mantell and others say there is a worrying tendency developing among both the public and policymakers to focus on the scale of the problem rather than the wide range of potentially useful policy solutions that can be brought to bear to help correct the program’s fiscal path.

“People just need to understand that Social Security is not going bankrupt,” Mantell says. “Not in 2034 or in 2033. Not ever.”

A Deep Public Commitment

While Americans may not exactly be well-informed about the intricacies of Social Security’s funding outlook, they are sure about one thing, says Martha Shedden, the co-founder of the National Association of Registered Social Security Analysts, and that is the benefits’ social value.

According to Shedden, a wealth of public survey data shows the vast majority of Americans actually agree on the importance of Social Security — and on the best ways to shore up the program’s finances.

NASI data, for example, shows nearly three in four Americans say they “don’t mind paying for Social Security” because they value the benefit for themselves and their families, and for the security and stability it provides to millions of retired Americans, disabled individuals, and children and widowed spouses of deceased workers.

Notably, Shedden points out, nearly nine in 10 Americans agree that current Social Security benefits do not provide enough income for retirees, and seven in 10 agree that Congress should seriously consider raising future Social Security benefits in order to provide a more secure retirement for working Americans.

According to Shedden, even more important than the broad-based agreement about the significance of Social Security is the consensus about changes that could be made to ensure the program can remain financially viable for the long term. She pointed to an NASI trade-off analysis that shows seven in 10 Americans would support a package of changes that increases Social Security revenues, pays for benefit improvements and eliminates the projected financing gap.

Specifically, the vast majority of Americans say they would support a plan that would gradually eliminate the cap on earnings that are taxed for Social Security, currently set at $160,200 for 2023, especially if the benefits formula was adjusted to allow higher earners to garner a higher benefit in retirement. Similar numbers support the notion of slowly raising the Social Security tax rate that workers and employers each pay from the current 6.2% of earnings to 7.2%.

Shedden says the data is clear, and that the vast majority of Americans agree that it is critical to preserve Social Security benefits for future generations, even if it means increasing Social Security taxes paid by working Americans.

The Planning Perspective

As Mantell and Shedden emphasize, this discussion about the real state of Social Security is not just a theoretical exercise — it has a direct impact on Americans’ financial lives today.

“One big problem is that too many people believe Social Security is just going to disappear in 2034 or 2035, when really that is not the case at all,” Shedden says. “Even if no action is taken by Congress, which we view as unlikely, a substantial amount of benefits would still be payable at that time.”

Shedden suggests this misunderstanding about the solvency of the program is one of the reasons that so many people elect to take Social Security early — thereby robbing themselves of tens or even hundreds of thousands of dollars in potential lifetime wealth accumulation.

“Many people are out there claiming early out of a false belief that the program is going to disappear in a decade,” Shedden warns.

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