Chances are that you have heard the rumor social security would never go broke if congress didn't steal from it in the first place but is that true? and where is the social security trust fund right now?
On a side note this is a little off topic from our usual scope as normally we discuss tax burden and strategies to minimize taxes on investments, but I think it is important to understand where said taxes go and also the implications on our future social security benefits (or lack thereof).
So where is all the money?
Social Security revenues have always been kept separate from general funds. Currently the social security administration has approximately $2.8 trillion in assets in the form of United States Treasury securities.
So what really happens? And why do people say the money is spent?
What happens is that when excess money is collected by the social security administration they invest that money in US treasury notes. The treasury/congress then counts that amount as a reduction in budget deficits (technically the money is spent here). Now you know why the social security administration is the single largest holder of United States Federal Debt (over $2.8 Trillion at the time of this writing). Currently OASDI taxes no longer cover benefit expenditures (since 2010) however, the interest earned from the treasury notes is more than sufficient to cover the difference. Current projections indicate that the amount in the trust fund will continue to increase from interest earned until sometime in 2019 when the social security trust fund will no longer be generating a surplus.
Why is there a revenue shortfall?
A couple of reasons, First there are simply too few people paying payroll taxes compared to those receiving benefits. In the 1950s there were more than 5 people paying into the system for each receipt. Currently for each person receiving benefits there are less than three people paying payroll taxes. Additionally, more people are living longer.
Will social security be funded after 2034?
Current projections indicate that the social security trust fund will be exhausted around the year 2034. At that point (or sometime before) the government has three options:
- Firstly use general funds to cover the shortfall (cut other programs or borrow more).
- Second reduce benefits (either raising the retirement age or reduce the dollar value of benefits).
- Lastly raise the social security tax
- Eliminate the ceiling on income that is taxed (currently at $127,200)
- Raise the employee payroll tax from 6.2%
- Raise the employer payroll tax from 6.2%
How could this affect my retirement?
Presuming that you are retiring or living beyond 2034 there are two possible impacts to anticipate.
- Expect your income or payroll taxes to go up at some point in the next 20 years
- Plan that your social security benefits may only be about 66-75% of current benefits. (This is the scenario where nothing is done on the revenue side of the equation and benefits are paid with what income is collected).