Previous posts have explained Social Security benefits available to you. However, Social Security has been widely and accurately reported as having an upcoming financial crisis. Many people, especially those in their 20s and 30s, now have doubts as to whether the system will survive long enough for them to receive benefits. How did we get here and what’s the likelihood of fixing Social Security?

Fixing Social Security

A little history is helpful. Before 1983, Social Security was a “pay as you go” plan with little or no surplus or need for one. Then the system had a financial crisis in the late 70s and early 80s which resulted in Congress fixing Social Security to make it solvent for at least the next 30 years or so. We are now at the end of this period. The system has always been designed to be self-funding and not to need any government subsidies.

Beginning with the 1983 Amendments, Social Security started stockpiling funds for future retirees. It was clear that the balance of workers contributing to the system versus retirees taking money out of the system was swinging more and more toward retirees. This swing continues with the huge number of baby boomers now entering into their retirement years. In 2014, the ratio is 2.8 workers for each system beneficiary. By 2030, when the whole baby boom generation has retired, it will be only 2 workers for every beneficiary. Two other major factors adversely affecting the system are increasing life expectancies and our low birth rate.

Social Security has been running a surplus every year since 1984. These surpluses have been invested in US Treasury Bonds. However the surpluses will stop later this decade, after which the system will operate at a deficit and have to begin drawing from its invested funds. The invested funds are projected to be exhausted in about 2033. After 2033, the system will continue to be about 75% funded for a long time. Fixing Social Security requires reforms to fill the 25% shortfall or the system will be unable to pay full benefits after about 2033.

These facts are fairly widely recognized but as yet there is insufficient agreement in Congress to enact a solution.

The chances of Social Security being eliminated are virtually nil. It’s still a very popular program. It’s the only retirement pension plan for a growing number of Americans. It’s called the “third rail” in politics (referring to the electrified rail on train tracks) because touching it has been historically hazardous to a politician’s health.

Reform Options

What are the options for fixing Social Security to extend its solvency past 2033? They fall into three broad categories, the first two of which have a high likelihood of occurring:

• Increase income (raise taxes);
• Decrease expenses (reduce benefits); and/or
• Re-invest system savings more aggressively in hopes of getting a better return.

Here are some specific reform options that have been proposed:

• Reduce the annual Cost of Living Adjustments (COLAs) that are applied to benefits;
• Pay a lesser amount of benefits to everyone or perhaps a targeted group such as high earners;
• Increase the number of work years used in the full retirement amount calculation from 35 to say 38 or 40;
• Raise the full retirement age (currently moving from 65 to 67) to say 68 or 70;
• Raise the early retirement age beyond the current 62;
• Reduce the family benefit percentage paid to spouses, ex-spouses and children from 50% to say 40%;
• Increase the Social Security payroll tax rate from the current 6.2% for everyone or for a targeted group such as high earners;
• Raise the annual taxable earnings ceiling for paying into Social Security (currently $117,000 in 2014);
• Extend coverage to workers not currently in the system (mainly civil service workers);
• Invest a portion of the system’s savings (more aggressively) in the stock or real estate markets;
• Make Social Security benefits more taxable.

The bottom line is that fixing Social Security is definitely possible and achievable. Study after study has published detailed proposals designed to make it solvent. So you can expect to receive substantial Social Security benefits in retirement, although you are likely to pay somewhat more for them in future years and they are likely to be somewhat less than they are currently.

A 2010 report from the Social Security Administration itself provides further details.