Social Security offers U.S. Government-guaranteed, inflation-adjusted lifetime income. Having such a guaranteed income is of great importance to most retirees, and it’s important to understand how timing and claiming decisions for Social Security can have an impact on the strategy you employ for drawing from other retirement assets. Just as you evaluate the investments you hold in your retirement portfolio, you should also review the viability of your Social Security. Each year, the Social Security and Medicare Board of Trustees reports to Congress and the American people the current and projected financial status of the two programs. On July 23, the Board issued its 2015 report, albeit about three months late. I want to outline a few of the key points addressed in the report.
The Board of Trustees governs over four separate, but related, trust funds established by Congress. These are (1) the Old-Age and Survivors Insurance Trust Fund, which is funded by employee and employer payroll taxes of 12.40% of covered income; (2) the Disability Insurance Trust Fund, which pays disability benefits to disabled persons who have not reached retirement age; (3) the Hospital Insurance Trust Fund, which is funded by employer and employee payroll taxes of 2.90% of income and covers inpatient hospital and related care; and (4) the Supplemental Medical Insurance Trust Fund, which covers Medicare Plan Parts B, physician and outpatient services, and Part D, the prescription drug benefit. Your payroll taxes usually appear on your paycheck stub as a deduction under Federal Insurance Contribution Act (FICA) taxes.
The Board of Trustees takes a long-term view and analyzes Social Security over a 75-year time frame. The full 266 page report can be found here: http://www.ssa.gov/oact/tr/2015/tr2015.pdf.
Social Security was designed as a pay-as-you-go system, meaning in each year all payroll tax revenue paid in is immediately paid out to current beneficiaries. To the extent excess payroll taxes are collected, reserves are built up within the trust fund and are available to be paid out in years where current payroll taxes do not cover current benefit payments. Today, the Social Security Old-Age and Survivor Trust fund has approximately 2.790 trillion dollars held in U.S. Treasury securities.
However, since 2010, Social Security benefits paid out have exceeded payroll taxes paid in. The deficiency in income has been made up from interest earnings on the reserves. In this year’s report, the Trustees are forecasting that, beginning in the year 2022, costs will exceed both payroll tax income and interest earnings and reserves will have to be redeemed in order to meet the scheduled beneficiary payments. Further, all reserves will be depleted by year 2035. After that, if Congress fails to act, the only money available to pay benefits will be that which is paid in from payroll taxes, and benefits will have to be cut by 21% and pay just 79% of promised benefits.
This is not new information, as the Trustees have been reporting this for several years. Historically, Congress acted in 1977 and 1983 to make adjustments in order to preserve Social Security. I feel confident Congress will again do the right thing to address the deficit projected in the Old-Age and Survivor Trust Fund. However, the longer Congress waits, the more it will cost in either higher payroll taxes or cut benefits, or a combination of the two, to make up the deficit.
This year’s report indicates that in order for the program to remain solvent over the next 75 years, Congress would need to raise the payroll tax rate by 2.62 percentage points to 15.02% from the current level of 12.40%, or reduce benefits by 16.4% to current and future beneficiaries, or reduce benefits by 19.6% only for people who become eligible for benefits this year or later.
However, there is one item that might actually force Congress to act sooner, much sooner, than anticipated. For anyone currently receiving disability insurance payments from Social Security, the short-term looks bleak. Since 2009, Social Security’s disability insurance payments have exceeded income. At the beginning of 2015, the Disability Insurance Trust Fund had only 40% of projected 2015 costs. The Trustees project full depletion of all reserves by the end of 2016. If Congress makes no changes, disability insurance payments will immediately drop to 81% of scheduled benefits at the end of next year.
Social Security is a key government program and a major component of any retirement income plan. We continue to forecast that Social Security will be there for current and future retirees, as projected under current law. We are confident that Congress will act, hopefully sooner and not later, to ensure the viability of Social Security. We do not feel you need to make any adjustments or major changes to your retirement income plans at this time. We are, however, watching this issue very closely.
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