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Will Social Security Be Around When I Need It (part two)?

Last time we reviewed the state of the Social Security trust fund for retirement benefits and determined that:

  • The trust fund will run out of money in 2034, and
  • If nothing is done, Social Security benefits will need to be cut by 25% so revenue matches outgoing benefits.
  • Politics will play an important role in determining the solutions that will fix Social Security.

Assuming there is political will to find a solution to the Social Security funding problem, here are some of the options that have been put forth by experts. The first two options are un-likely, but I include them because they are viable options:

  • Reduce benefits for all current and future Social Security recipients; this is the least probable route because current retirees vote and no politician wants to stand up in front of his/her constituents and say they voted to reduce Social Security benefits; look at the backlash that occurred when the Affordable Care Act was being debated.
  • Simply allow the trust fund to go to $0 and have a pay as you go system; this would require Social Security benefits to be reduced by 25% for all new retirees; this is also an un-likely option, but it could happen.

More probable options include:

  • Increase the employer and/or employee payroll contribution to Social Security (currently it’s 6.2% of covered pay).
  • Increase the Social Security wage base; this is the maximum pay that is taxed for Social Security purposes; the maximum is $128.700 for 2018; Medicare taxes have no limit.
  • Increase the full retirement age (currently it’s 65 if you were born before 1937 and gradually rises until age 67 for someone born after 1960).
  • Change the cost-of-living increase formula.
  • Use an income test to determine if an individual or family needs Social Security benefits; for example, if someone has retirement income from other sources that exceeds $X, Social Security benefits would be reduced.
  • Change some of the Social Security benefit options (as happened in 2016).
  • A combination of these options.

The closer we get to 2034 the more dramatic the solutions will need to be in order to work. For example, gradually increasing the employer and/or employee payroll tax works best if it’s started sooner rather than later. It’s the same issue with allowing the Social Security wage base to increase over time.  Starting this in 2018 allows the increases to be less than starting in ten years.

What’s going to happen? My suspicion is that the politicians will find ways to “kick the can down the road” and delay making any meaningful decisions for the next few years. However, I am optimistic that the necessary decisions will be made to ensure almost full benefits for current and future retirees. My guess is that a combination of the choices listed above will be used to reduce the impact on any one group. For example, increasing payroll taxes, letting the Social Security wage base increase and increasing the full retirement age are all relatively painless options that will increase the solvency of the Social Security trust fund for many years.

Bottom line: yes, you will have Social Security retirement income benefits and probably at the approximate level you would have under the current rules. How we get there will be the interesting part of the journey.