Social Security & Insolvency – What Does It Actually Mean? Instead, it “invested” in its own bonds. This renders DI highly dependent on incoming tax revenues being sufficient to fund annual benefit obligations. Dont Believe It! The crisis is already hurting Social Security, and that could spell trouble in the long run. Can retirees depend on it? Remember that Social Security is, by its own admission, within 16 years of bankruptcy. My guess is that Congress will spread the damage by adopting a blend of the first five choices. The Social Security and Medicare Trustees have released their reports on the financial state of their programs. If you’re healthy, it will probably tell you that waiting leaves you several hundred thousand dollars to the good. Boston University economist Laurence Kotlikoff proposes that we freeze benefits earned to date while having future benefit accruals come from a sort of mandatory 401(k). Electric Vehicle Mandates Need Nuclear Power to Work. I aim to help you save on taxes and money management costs. Must Read: 6 Costly Social Security Traps To Avoid, How Your Social Security Benefit May Be Unfair, 14 Rules For How Social Security Benefits Are Calculated, The 66/70 Social Security Strategy For Married Couples, I aim to help you save on taxes and money management costs. The word “Insolvency” means “inability to pay obligations”. Workers’ subsequent benefits are paid from dedicated trust funds, with these funds’ aggregate payments limited to the total revenues they receive. Ms. Konish, in a post on cnbc.com, cited the economic impact of the COVID-19 pandemic as … The savings account is empty. Even though the Trustees do not incorporate the adverse economic or health consequences of COVID-19, they find Medicare Part A will face insolvency in 6 years and Social Security’s trust funds will run out in 15 years. Monday, August 22, 2011. Social Security’s insolvency is not some far-off event. Boston University economist Laurence Kotlikoff proposes. The Committee for a Responsible Federal Budget last week projected the point of exhaustion for Social Security’s Trust Fund reserves will arrive by 2013, according to CNBC Personal Finance Reporter Lorie Konish. Is Social Security’s insolvency a mere myth? The program now provides benefits to over 50 million people and is financed with the payroll taxes from over 150 million workers and their employers. When is Social Security going under? The likelihood that payroll taxes will be jacked up toward the end just aggravates this problem. Constructing Social Security in this way was a discretionary policy choice of lawmakers. Steal benefits. As for the proposal from Governor Traffic Cone: While we can’t rule out means-pilfering, the likelihood is low. I’ll consider the risk of a bad outcome like that, as well as the probability of a real reform that would replace the phony trust fund with real savings. In the real world, any changes would likely be gradual and phased in over time. DI began 2020 with trust fund reserves amounting to less than eight months’ worth of benefit payments. We were already running out of time to repair Social Security, even before our current crisis hit. Some background is necessary to understand the situation fully. The other is that the report’s projections are already obsolete, because they do not account for the economic contraction currently underway. And, of course, we can choose to abandon its current financing method at any time in favor of a different one. Will COVID-19 Bring Social Security Closer to Insolvency? There are some easy, less draconian, solutions to the Social Security disability insolvency problem. Divide $12,400 by $106,200.) In 2011, Social Security had a surplus - revenue plus interest income in excess of outgo — of $69 billion. The latest trustees’ report shows how urgent the problem had already become before COVID-19 unleashed its damage upon both health and economy. Without Congressional intercession, by 2034, Social Security will be cut across-the-board by about one quarter to ensure all beneficiaries receive their payments. One is the current health crisis that is obscuring all other policy challenges. Dozens of mixtures of these different policy approaches would make the program solvent into the infinite horizon. Charles Blahous April 24, 2020. Nevertheless, it bears repeating that the lion’s share of the Social Security shortfall, whether in DI or in old-age benefits, will face us irrespective of how much the recession exacerbates it. That all sounds like terrible news. Social Security Disability Running Out of Money? Category: Social Security Insolvency. Alternatively, closing the shortfall totally on the spending side, excluding current beneficiaries from benefit cuts, would require a 23 percent reduction in future benefit claims. What’s Your Social Security Benefit Worth? © 2021 Forbes Media LLC. Further modifications of the program are a certainty as the Congress continues to … For years, experts have been warning that Social Security's long-term financial outlook is … In my view, no outcome is preordained. He fully intends to put the money back after a good crop. Many people of all ages have some connection to the program, including an estimated 178 million covered workers and approximately 64.5 million beneficiaries in 2020. These will not be good. Another revenue item is a theoretically dedicated portion of income tax collections, the amount coming from an artificial boost in the taxability of Social Security benefits. This is an admirable plan. They could have just as easily chosen to do it differently. He amasses $1,000. I would put the odds at 33 to 1 against. But honestly, how much does he have set aside now? When the federal government set up the Social Security fund, it didn’t do that. More likely, Social Security’s shortfall will swell further as unemployment surges, payroll tax revenues plunge, disability claims rise, and interest earnings fall, all of which we expect during a recession. He didn’t run far on this plank. The sobering contents of the report’s analysis are being underreported … Social Security is financed by a 12.4 percent tax on earnings of up to $137,700, with the tax split evenly by employees and their employers. To put this into perspective, the average monthly benefit would be reduced from $1,461 to $1,095.75–$13,149 per year. Some background is necessary to understand the situation fully. Allowing for the possibility of a congressional double-cross would shrink the expected gain from waiting. The sobering contents of the report’s analysis are being underreported for at least two reasons. How Much Of Your Social Security Benefit Is Taxable? More money is going out in benefits and overhead ($714 billion a year) than is coming in from payroll taxes ($646 billion). Jeff Szymanski works in political communications at The Association of Mature American Citizens. Benefit cuts of up to 25% would be necessary to continue paying retirees. Newsletter. Now it appears the situation may have worsened, thanks to COVID-19. Nevertheless, it would be a severe mistake to ignore the information this report contains. Tax law is a frequent subject in my articles. The Inspector General for the Social Security Administration (SSA), Gail S. Ennis, is designating Thursday, March 4, 2021 as the second annual... Blog. Social Security’s Funding Shortfall Overview Social Security provides monthly cash benefits to retired or disabled workers, their family members, and family members of deceased workers. Social Security Could Be Insolvent Sooner than 2035. (You should have to count only half your benefit as income, but the formula makes you report up to 85%. In 2019, the Federal Poverty Level is $12,140. Why Are Millions of Doses of COVID Vaccines Sitting in Warehouses? Like Medicare, the main source of funding for the program is payroll taxes collected from workers and their employers. A two-point boost would erase much of the coming revenue shortfalls. there’s a calculator that evaluates your payout stream, discounted for time and mortality. Increase the payroll tax, currently 11.7%. Insolvency “The inability to pay one’s debts” is the dictionary definition of insolvency. The shortfall is going to get worse as baby boomers age and the ratio of workers to retirees goes down. They’re afraid that Congress will double-cross the late starters by chopping payouts. Before you can collect? About 40 years ago, Congress set the taxable earnings cap to cover about 90 percent of all wages, with increases annually to reflect average wage growth. There’s supposed to be $2.7 trillion set aside in a trust fund to cover Social Security benefits. I think most of the people claiming early out of fear are making a mistake. Slog away for 45 years and a decade of Fica contributions goes down the drain. Ultimately the future of Social Security depends on policy choices we make as a country. That’s true, but the implication that Social Security is a safe investment is false. At that point, if not addressed, the law calls for a devastating 20 percent across-the-board cut for all Americans who rely on the program. This would mean not just taking money from the wealthy but also taking money from middle-class frugal workers and handing it to middle-class spendthrifts. When he was running for president, Chris Christie proposed reducing Social Security payments to people with retirement incomes above $80,000 and eliminating them at incomes above $200,000. It will affect virtually all current and future workers and many of today’s current retirees. Among other things, Fichtner noted that Social Security faces a nearly $15 trillion funding shortfall and will face insolvency in only 16 years. Increase the maximum fraction of benefits subject to income tax from 85% to 100%. That is, they collected at 66 or even at 62 instead of waiting until age 70, when the payout reaches its maximum. Even a slight increase in claims, coupled with a substantial reduction in payroll tax collections, could draw down its reserves and deplete the fund in just a few years—possibly even within the next president’s term. In What’s Your Social Security Benefit Worth? We need to raise future eligibility ages, but we can still choose to claim benefits earlier than previous generations did, before Social Security’s earliest eligibility age was lowered from 65 to 62. I have been an Enrolled Agent since 1979. There’s a lot of talk about whether the baby boomer generation will bankrupt Social Security.It's not just the size of this generation that's a concern; it's their life expectancy. it’s time for congress to act on social security insolvency. When you contribute to a 401(k), you build up a genuine trust fund. Low. To fix this problem, we will need political leadership and a willingness to compromise. Legislators could fiddle with the formula, perhaps limiting the damage to higher-income recipients. These numbers are daunting enough, but consider that lawmakers have never been willing to allow tax rates and benefit levels to change so suddenly. The purpose of this essay is to look at what changes are possible and how you can defend yourself. The shortfall is already so large that we will need contributions from every category of reform, including eligibility age changes, moderations of benefit growth, and increased program taxes. No, benefits are not going to be sliced right away. Still, this financing basis carries certain benefits of which we should be mindful, as well as certain obligations. Zero. But what is the probability that Congress will enact a wise reform? The normal retirement age is now 66, and it’s going up to 67 for people born after 1959. According to the most recent report from the Social Security Board of Trustees, Social Security is set to run out of assets by 2034. The account would be invested, via stocks and bonds, in real capital assets rather than phony IOUs. Consider this analogy. On Wednesday, April 22, the Social Security trustees issued their annual report on the program’s financial condition. Social Security defenders are quick to point out that stocks and bonds are subject to market risks—they might return zero, or even something negative. See How Much Of Your Social Security Benefit Is Taxable?). But the insolvency of the Social Security Administration means that down the road big changes are inevitable in … Social Security’s retirement and disability trust funds, combined, are on track for insolvency in 2034 — one year later than the entitlement program’s trustees predicted one year ago. At the very least, the current crises will absorb our precious time, during which Social Security’s problems will grow more difficult to solve. Relying on one mechanism to the exclusion of the others is unlikely to generate sufficient improvements. It shows us that, even as we are preoccupied with our immediate crises, Social Security’s projected insolvency is rushing toward us and must be dealt with soon, whether we wish to or not. Maurie Backman (TMFBookNerd) Apr 28, … A fairer way to describe what is going on: Fica (Federal Insurance Contributions Act) taxes are running $68 billion short and the government is covering that out of general revenue. This allows them to escape the frequent reassessments of eligibility rules and benefit levels typically applied to welfare programs financed from the government’s general fund. I put the odds against it at 2.7 trillion to 1. Come 2034, so say the system’s trustees in their 2015 report, the trust fund will be exhausted and, absent a law change, they will be able to disburse only 75% of promised benefits. Last week, the Social Security Administration (SSA) released its annual report card, showing that Social Security and Medicare are teetering on the brink of insolvency… and getting worse. Raise the retirement age. We don’t yet know how much worse Social Security’s situation will be after the smoke clears from our current health and economic shocks. Despite the ease with which the shortfall could be solved, I am doubtful the right-wing would ever do anything to make it happen. Copyright © 2020 Mercatus Center at George Mason University, The Rattler’s Tail and Snakebit Pollsters, Keep Social Security Politics Out Of the Coronavirus Crisis Response, The Capitol Insurrection Through the Lens of Chinese Propaganda, Memo to Team Biden: Rein in the Export-Import Bank, A College President Defends Free Speech on Campus. The financing frameworks of Social Security and its sibling program, Medicare, are unique among federal programs. I graduated from Harvard in 1973, have been a journalist for 45 years, and was editor of Forbes magazine from. Here’s the best news of all: a Social Security system with moderated cost growth will actually be a more effective and equitable one. With privilege, however, comes responsibility: these benefit protections can only continue if lawmakers ensure that total payment obligations do not exceed the program’s revenues. That’s when today’s 51-year-olds reach the normal retirement age and when today’s youngest retirees turn 78. This would help keep you out of a higher tax bracket if item #5 comes into play and lessen the damage from a worst-case scenario involving #6. That would be roughly equivalent to cutting benefits by 10%. Could Social Security Be Pushed Into Insolvency Before 2030? In contrast, the worst result would be an across-the-board benefit expansion as some politicians have irresponsibly proposed, which would worsen system finances as well as its distributional inequities. The current growth schedule exacerbates the program’s imposition of net income losses on younger generations, causes taxpaying worker standards of living to be depressed relative to beneficiaries’, creates work and savings disincentives, and unintended pockets of regressive income redistribution. He wrote this piece in an effort to explain insolvency with an easy to understand example. Concentrate your career. But the insolvency of the Social Security Administration means that down the road big changes are inevitable in payroll taxes or benefits or both. For now, the government is covering the shortfall the way it pays for other things: by borrowing, collecting income tax and printing money. Opinions expressed by Forbes Contributors are their own. By the time Social Security’s combined trust funds are running dry, even the complete elimination of all new benefit claims would not prevent their depletion. The existing benefit formula counts only your 35 best earning years.