The majority of American baby boomers don’t worry much about what’s happening at the Social Security Administration. They’re already setup in the system and for them there is still money in the kitty. It’s the millennials generation that should be watching this issue carefully as they are the ones that will be most affected.
According to a report released last July, the trustees of the Social Security system’s finances say that the combined trust funds that help pay old age and disability benefits are likely to run out by 2034 the year when today’s 48-year-olds reach full retirement age. This estimate changes slightly each year as it reflects the most current economic and demographic projections. Last year’s estimate for trust fund depletion was 2033.
The trustees of the Social Security system’s finances say that the combined trust funds that help pay old age and disability benefits are likely to run out by 2034.
What does it mean when we say that the Social Security trust fund will run out? Let’s take a look at the history of Social Security and what role it has played in the lives of America’s pensioners and disabled.
The Old-Age, Survivors, and Disability Insurance (OASDI) program commonly known as Social Security, just celebrated its 80th birthday on August 14th. It was on that date in 1935, that U.S. President Roosevelt signed the Social Security Act into law. It was originally implemented to assist older Americans by disbursing funds to retired workers so they would have a continuing income. Over the years, amendments to the program were added which extended benefits to the spouse and minor children of retired workers, workers who become disabled, families in which a spouse or parent dies and more recently medical health coverage (Medicare) for Social Security beneficiaries.
FICA Funds
The Social Security program is funded through the Federal Insurance Contributions Act (FICA) tax, a dedicated payroll tax. The numbers have changed over the years but at the moment, each employee and his or her employer must pay in 12.4%. (Self-employment tax used as a business expense entitles the worker to deduct half of this amount.) This tax is what finances Social Security and monies not paid out in benefits (considered a surplus) is used to buy U.S. government bonds held in the Social Security Trust Fund.
The money Americans pay through these taxes is not the same money they will receive when they reach the age that entitles them to collect SS benefits (ages have gone up over the years). Rather the money paid out as Social Security taxes works basically as a pay-as-you-go system where the money contributed at the time of employment is used to fund payments to people who are already receiving benefits as listed above.
So here’s where the problem comes in. Americans are having fewer children and at the same time they are living longer, resulting in an aging population. Baby boomers (those born between 1946 and 1964) are retiring at a record pace: 14% of the population is age 65 and over, and by 2080, it will be 23%.
At the same time, the working-age population continues to diminish and will drop from about 60% today to 54% in 2080. These declining worker-to-beneficiary ratios will see fewer people funding the Social Security system and more people pulling money out. The combination of these factors has resulted in a situation where the Social Security "bank account" will be exhausted in 2033, when it will have only about 77% of what it should pay out that year. What this means is that if there are no changes made to the system in the next few years, all those people now in their forties or fifties, may not have access to the Social Security benefits during retirement, even though they are paying into it now.
Should this happen, would-be retirees will either have to continue working well into their 70’s or 80’s or start digging into their other investments, in order to have enough discretionary income to spend during their golden years.
When the Social Security system was overhauled in 1983 and up until 2010, the amount of payroll tax dollars flowing into the system was more than the amount of money that was needed to fund the benefits. Any extra money was deposited into a trust fund, and was invested in Treasury bonds. The interest from the Treasuries and taxes on higher-earning beneficiaries has enabled the Social Security system to continue to draw in a bit more money than it pays out each year.
Surplus Running Out
But this is changing and soon Social Security will be forced to turn to these past surpluses in order to pay beneficiaries—and 2034 is the year that the surplus is currently expected to run out, when 79% of the benefits will drop off.
According to the 75th Annual Report of the Board of Trustees, during 2014, $646.2 billion in payroll taxes was collected from 166 million working Americans. But that proved insufficient in covering the $859 billion in Social Security benefits that were collected by 59 million people, including 42 million retired workers and their dependents, six million survivors of deceased workers, and 11 million disabled workers and their dependents.
The gap between what Social Security should be paying and what it will collect amounts to about 1.2% of GDP in 2035. That may sound like a serious figure but it can be fixed. Some of the ways suggested for addressing the shortfall include an increased tax rate of 16.4 percent , benefit cuts, and upping the age at which people can start collecting benefits (or a combination of these). Let the millennials generation take heed before it is too late.