Will Social Security Be There for You?

The latest Social Security Trustees report makes a dire prediction, projecting that the retirement trust will be depleted by 2032. Upon reading this headline, it's easy to conclude that the situation is helpless for future retirees. While this situation certainly demands action, it may not be as catastrophic as our worst fears.

In truth, this conclusion jibes with the assumptions of many young to middle-aged working adults who do not expect to receive anything from Social Security. Usually when I run a retirement projection for someone under 45 years old, they do not want to consider Social Security at all. Echoing this sentiment is Gallup's latest poll of non-retired adults. Of those polled, 19 percent expect to receive nothing from the program, while another 43 percent expect it to be only a minor portion of their retirement income.

Before we look at potential reforms, let's consider what is forecasted to happen in 2032. The Social Security retirement system is funded by a payroll tax of 6.2 percent on the first $184,500 earned by each worker in 2026, with employers matching the contribution. Most of the Social Security benefits currently flowing to retirees are supported by payroll taxes collected in the same year. The Social Security trust fund helps support these payments.

In 2032, the fund is expected to be exhausted and at that time Social Security retirement will only have enough money to pay out 78 percent of the promised benefits. This is an important point. Even if Congress does nothing, benefits would be cut but wouldn't evaporate overnight.

Indeed, if we look back to the last significant Social Security reform started in 1983, we were also facing imminent trust fund exhaustion. The bipartisan Greenspan Commission considered the options to shore up the system and recommended a combination of higher revenues and reduced costs. Congress ultimately went further and increased the full retirement age from 65 to 67 gradually, began partial federal taxation of benefits for higher-income retirees, and included new federal workers in the system.

The fact that Congress has not made significant reforms in Social Security for more than forty years helps explain why the Trust Fund is on the road to insolvency. Americans are living longer, and the number of workers supporting each Social Security beneficiary has fallen dramatically. At the same time, fertility rates have declined. Those demographic changes mean that Social Security is supporting more years of retirement with fewer workers per beneficiary.

When looking for likely reforms, we may see an echo of those enacted in the 1980s. The full retirement age could be adjusted upwards over time from the current age 67 for everyone born in 1960 or after. Benefits could be fully taxed as income, rather than a portion under current law depending on retiree income. The formula for annual inflation increases could be changed, potentially resulting in lower future increases. The wage base subject to Social Security tax could be increased, with only a token boost in benefits for higher earners. Finally, payroll tax rates could be increased and the benefits themselves could be reduced for higher income retirees.

If you fancy yourself a policymaker, I encourage you to go to the Committee for a Responsible Federal Budget at crfb.org/socialsecurityreformer. There you can find a calculator that you can use to close the trust fund gap. While this nonprofit does have a clear interest in advocating for a smaller federal budget, the calculator is an interesting tool to explore options.

Whatever the future holds, the consequence of congressional inaction could be a reduction in Social Security benefits starting in 2032. For retirement projection purposes, those who are still working might consider whether their plans would pass muster if their eventual Social Security benefit were 22 percent lower than currently projected. Although if history is any guide, Congress is likely to eventually pass reforms that stabilize the program's finances, with at least some of the changes likely to fall more heavily on people who are far from retirement. Regardless of what's proposed, the longer Congress waits to make reforms, the more draconian they are likely to be.

David Gardner is a certified financial planner in Boulder County and is admitted to practice before the IRS. He can be reached at entreewealth.com. As financial planning is only possible after knowing the client, the column is not intended to be personal financial or tax advice. Data presented is believed to be accurate at the time of writing.