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“We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions… With those taxes there, no damn politician can ever scrap my social security program.” -President Franklin Roosevelt, as quoted by historian Arthur Schlesinger Jr.

Social Security Trust Funds: Financial Trouble Ahead…Maybe

On July 13, 2017, the Trustees of the Social Security insurance trust funds released their 2017 Annual Report. The report’s true purpose is to notify Congress of the funds’ current status and to forecast short- and long-term projections. The bottom line is this: Social Security is under tremendous stress to continue to pay benefits under current rules and laws. The good news, however, is that should Congress choose to act sooner, any reforms it legislates will be less disruptive and less burdensome on workers, and will secure a minimum level of retirement income—a safety net—for future generations of U.S. workers.

The Trust Funds

The Social Security program consists of two separate but related insurance trust funds.  The Old-Age and Survivor Insurance (OASI) trust fund pays out retirement benefits to retired workers, their families, and survivors. The much smaller Disability Insurance (DI) trust fund pays monthly benefits to disabled workers and their families. The combined programs are commonly referred to as OASDI.

Summary of OASDI Trust Fund Financial Operations

(in millions)

OASI            DI OASDI
Reserves (December 31, 2015) $2,780.3 $37.3 $2,812.5
Total Income in 2016 797.5 160.0 957.5
Total Cost in 2016 (776.4) (145.9) (923.3)
Net Increase in Reserves 21.1 14.1 35.2
Reserves (December 31, 2016) $2,801.3 $46.3 $2,847.7

The vast majority of trust fund income comes from payroll taxes paid by employees, employers, and the self-employed. Payroll tax contributions were over 87.5% of the trust fund income last year. The other 12.5% was interest on the $2.78 trillion held in reserve (9%) and the income tax collected from beneficiaries on the benefits paid to them. (Yes, even Social Security payments are subject to income taxes.) Taxation of benefits contributed 3.5%.

In 2016, total income exceed exceeded total cost and resulted in a small growth in trust fund reserves of $35.2 billion. However, payroll tax collections from the approximately 170 million workers who paid into social security last year did not cover the cost in benefits paid out to 61 million beneficiaries. Payroll taxes collected were $836.2 billion and $911.4 was paid out. Further, payroll tax collections have not covered benefits paid out since 2010.  And, therein lies the problem.

According to the Social Security Trustees, if Congress does not act, the U. S. Treasury will have to start drawing down on the $2.8 trillion in reserves starting in 2022 because total cost will exceed all income (payroll taxes, interest, and income tax). Further, if no action is taken by Congress, reserves will be depleted in 2034. Once the reserves are depleted, the contributions from payroll taxes and taxation of benefits will be enough income to pay only 77% of scheduled benefits. Thus, everyone receiving benefits in 2034 and beyond will immediately begin receiving only 77% of their expected benefit under current laws.  Anyone born before 1972 will be eligible for Social Security in 2034 (age 62+).

Solutions to These Challenges

In our opinion, there are several ways to address the looming actuarial deficit. And, if a few of these methods were combined, coordinated, synchronized, and implemented sooner rather that later, then all workers (future retirees) would have an opportunity to plan their future retirement income and have a higher confidence that their payroll contributions to Social Security over their entire working lifetime would generate a retirement and survivor benefit they could predict and count on.

Congress can consider measures that include, among others, increasing maximum earnings subject to Social Security payroll taxes (currently $127,200); raising the normal retirement age (currently 66 for individuals born between 1943 and 1954; 67 for those born in 1960 or later); lowering benefits for future retirees by modifying the benefit calculation formula; and reducing the cost-of-living adjustments (COLAs) for all retirees.

Fixing the funding and benefit payments for Social Security is a serious issue that Congress should ideally address now. So far this year, five reform proposals have be submitted to the Social Security Administration’s Chief Actuary for analysis. In addition, in the House, reform proposals have been introduced and referred to committees, but continue to languish there and may never be acted upon.

We hope you’ve found this month’s Monthly Insight to be educational and helpful. Thank you very much for the trust and confidence you’ve placed in our firm. We value our deep relationships with our clients. If you know of someone who would benefit from our advice and services, we would welcome an introduction.