Is Social Security Going to Run Out?!
Is Social Security going to run out of money? That's the question that every retiree and pre retiree is asking themselves, and rightfully so. So that's what we're gonna talk about here today on Retirement Answers. Hey there, my name is Jacob Duke. I'm the founder of River Tree Wealth and the host here of the Retirement Answers podcast.
Jacob:I'm glad to have you with me today. So when it comes to Social Security, there are just a lot of questions that retirees have to face and answer for themselves. Things like when should I take my Social Security benefits? Or how much will they be? Or what's the pros or the cons of taking it early or delaying into the future?
Jacob:What about spousal benefits? How are those calculated and how do they work? Or even survivor benefits. What am I entitled to if my spouse passes away one day? And those are all valid questions.
Jacob:They're very important questions whenever it comes to planning out your retirement. But the biggest question out of all those might be, is Social Security going to be around in the future? Or will I get back what I paid into the system over time? And so these questions are front and center now because it's become apparent that the Social Security Trust Fund might actually run out of money sometime in the mid two thousand and thirty's. So here's here's what we're gonna do today on the episode.
Jacob:We're gonna talk through the latest Social Security Trust Fund report and the new details from it. And so this is a report that's produced annually by the Board of Trustees. We're gonna review that and talk through some of the things that are mentioned there. We're gonna talk through some possible solutions as I see it, some of the things that I think can be done to help shore up or fix the potential shortfall. And we're also gonna go through how you as a retiree or someone who's planning out your retirement should think about or evaluate the situation to help make the best decisions for you and your family.
Jacob:So with that said, let's go ahead and get started. Social Security, which is more formally known as old age and survivor's insurance, has a trust fund that has accumulated over the years as there have been more tax dollars paid into the Social Security system than there were benefits paid out. So we've had a surplus up until recently, coming in every single year. And just so you know, Social Security is a year by year funded basis. So every year the dollars that are taken in, to fund Social Security, those are immediately paid out.
Jacob:So it's not, it's a pay as you go type system rather than this large accumulation or was designed to be a pay as you go system. So, over time though, we've had a trust fund build up or a pool of money because we've taken in more tax dollars through the Social Security taxes and that were given out in benefits. Now this is starting to shift and that's what we're gonna talk about today. So every year these taxes are paid by employers and employees on the employees earned income. So what are those taxes and how they work?
Jacob:Well, they're not necessarily your normal income taxes, which we pay every year. They're actually gonna be taken or withheld from your paycheck every single paycheck. And so this actually falls under the OASDI taxation, which is a part of your FICA taxes. So that tax rate is 6.2% for the employee and 6.2% for the employer. And if you're self employed, lucky you, you get to pay both the sides of that.
Jacob:So you get to pay 12.4% total. So this is the OASDI, which stands for Old Age and Survivors and Disability Insurances. So this is the tax that helps pay out benefits for social security, but also disability benefits. Now, this does not include your Medicare tax, which is an additional 1.45% for the employee and additional 1.45% for the employer, which is a total of 2.9. So whenever we take these two taxes, the 12 for social security and disability, but then also the 2.9 for Medicare, you have your total FICA tax, which equals 15.3% split down the middle between the employee and the employer.
Jacob:So that is how social security is funded on an annual basis. Whenever we have taxes paid in, based on those tax rates, that is called income whenever we're talking about, the social security system. So we receive that tax money and that's income and the expenses are the benefits that are being paid out. So that's how it works. Now, what's the problem here?
Jacob:Well, in 2021, that was the very first year that the income received from those taxes was actually less than the expense of the benefits that it paid out. So this means that 2021, the trust fund reserves had to be tapped for the very first time to help make up this difference. So why is this becoming a problem now? Well, here's a direct quote from the Social Security Administration Trustee Report that was just published on 05/06/2024. Now this report is for the year 2023.
Jacob:So whenever they were summarizing the causes of issues around Social Security funding, it says OASDI cost has generally increased much more rapidly than taxable payroll since 2008. So we can see that the cost has been creeping up or growing in relation to income since 2008, but it wasn't until 2021 that that cost actually exceeded the tax dollars received. And it goes on to say, and is projected to continue to do so until about 2040. So this increase in costs is actually gonna be going up until at least 2040. Now, in this period, the retirement of the baby boom generation is increasing the number of beneficiaries much faster than the increase in the number of covered workers as subsequent lower birth rate generations replace the baby boom generations at working ages.
Jacob:So what this really means is, is we have more people needing benefits that are getting to benefit age, so 62 and beyond, that baby boom generation. But then also we have less people working in the workforce to help pay for those benefits. So there's the scale is not balanced out correctly. So have too many people needing benefits compared to the number of people paying in. So that's the issue and why this is becoming a problem here now.
Jacob:So how big is this shortfall? That might be a question you have. Well, going back to the report, it said at the end of twenty twenty three, the OASDI program was providing benefit payments to about 67,000,000 people. Now during the year, an estimated 183,000,000 people had earnings covered by Social Security and paid payroll taxes on those earnings. So the total cost of the program in 2023 was 1,392,000,000,000 and the total income in 2023 was 1,351,000,000,000, which consisted of 1,284,000,000,000 of non interest income and then 67,000,000,000 of the income was actually interest earnings on the trust fund.
Jacob:It goes on to say that asset reserves declined in 2023 from 2,830,000,000,000 at the beginning of the year to 2,788,000,000,000 at the end of the year. So there's a lot of trillions and billions kind of mixed in there and might be confusing, but here's what you need to know. The income was $42,000,000,000 less than the expenses in 2023. So that $42,000,000,000 had to be taken from the trust fund. So that's what we're looking at is $42,000,000,000 short, meaning we didn't have enough taxes to pay out the benefits.
Jacob:That's what had to be taken from that trust fund, which has a balance of 2,788,000,000,000 at the end of twenty twenty three. So it feels like maybe there's enough room to keep going in terms of if we have to only pull 42,000,000,000 from this trust fund, that shouldn't be a problem, right? Well, the issue here is that that amount we're going to be shortfall. So how much we have to take from the trust fund is actually going be growing over the next few years because of the baby boom generation and how many benefits will be needed to pay out. Also, the report goes on to say that under the trustee's immediate assumption, Social Security total cost is projected to be higher than its total income in 2024 and all later years.
Jacob:Total costs began to be higher in 2021, as I mentioned earlier, and then Social Security's cost has exceeded its non interest income since 2010. Now that non interest income that it's referring to there is actually the FICA tax or the OASDI tax that we talked about earlier, that 12.4%. So now we're actually having to use that tax as income into the fund, but then also we're having to use interest on the trust fund itself to help pay out benefits, and that is still not enough, meaning we still have to go tap the trust fund to go pay the benefits that people are owed. So what does this actually mean and how long do we have before the trust fund is actually depleted completely? The report goes on to say that the level of the hypothetical combined trust fund reserve declines until reserves become completely depleted in 2035, one year later than projected in last year's report.
Jacob:So that's some good news at least. Last year, the 2023 report showed that the total reserves of the total trust fund is actually going to be depleted in 2034. But the news 2023 report projects that the fund will actually be depleted in 2035. And so if no action is taken, the report says at the time of depletion of these combined reserves, continuing income to the combined trust funds would be sufficient to pay 83% of the scheduled benefits. So what does that mean?
Jacob:That means that the continued taxes that will be received are enough every year to pay out 83% of the benefits that will be projected to be needed at 2035 and beyond. So there's a couple of things here. Number one is it doesn't seem like your benefits, if you're receiving them as a retiree are going to go away completely. If anything, will be reduced because we will always be receiving at least some sort of income through the FICA tax or the OASDI tax that we'll be able to pay social security benefits and disability benefits. But is that enough to cover in all of the Social Security benefits we have out there that are necessary?
Jacob:The answer looks to be no, it won't be unless some changes are made. But the good news is, is that not all of your benefits are gonna go away or go to 0%. Meaning you're you're gonna at least get something still out of the deal even if nothing is done. So 83% is kind of what they're saying. That's how much of your current benefits or what you would be receiving at that time.
Jacob:That's how much you would get if no changes are made to how all this is functioning and working and taxes and everything there. So that's where we're at. That's kind of the problem that we're looking at and evaluating and facing, and it's really on top of a lot of retiree's minds. So I wanted to say what maybe some possible solutions are. And these are some ideas that I have, And we'll actually look and see what the report says here in just a second, maybe as some potential solutions as well.
Jacob:But some thoughts I have as well, we can increase the tax rate. So if the OASDI tax is 12.4%, we can increase that to help cover shortfall. We can also push back the first age of eligibility beyond 62. So 62 is the first age that anyone is eligible to begin receiving their social security benefits. Now, then when they do that, they have to do it at a discount, meaning they're not going to get their full benefit, But maybe that's something we can think about is pushing that age back to a later age.
Jacob:We've seen this done in other areas such as RMDs because folks are living longer. So RMDs require minimum distributions. That beginning age has actually been pushed back over the last few years from 70.5 all the way up to potentially 75, depending on your year of birth. Another thing that we could do is actually increase or perhaps eliminate entirely the taxable wage base. So this is how much of your income is actually eligible to be taxed for FICA or for the OASDI program.
Jacob:So in 2024, only $168,600 is actually eligible to be taxed at that 12.4% rate. Anything above that is not taxed. So potential solution here could be to actually increase that income amount to a higher amount or perhaps even eliminate it entirely if that is the case. So that means that anyone, let's say making more than that, perhaps a million dollars a year has to pay their portion on their full income rather than just that 168,600 here in 2024. And that wage base is actually increasing every single year based on inflation.
Jacob:So maybe that's one solution as well. Perhaps we can reduce the annual COLAs. So this is whenever someone's receiving benefits or eligible for benefits, you get a cost of living adjustment every single year. That's also again based on inflation rates. And so that one solution there could be what if we actually increase benefits over time for people at a lower rate or have some different sort of calculation that actually lowers how much benefits are going up in those cost of living adjustments.
Jacob:Also, you could say reduce benefits entirely across the board, probably not a very popular option. You can also think about benefit reductions based on income. So just like you have IRMAA taxes for Medicare surcharge premiums, meaning you earned too much money, therefore you have to pay a higher premium on your Medicare insurances. Maybe you have, reductions in social security benefits if you earn too much money, meaning you have too much taxable income on your tax return. Perhaps that's another option because at the end of the day, this program was designed to be a supplemental program or, basically to help people stay out of poverty in the later years of their life.
Jacob:And so, if it's really designed to be that, then maybe that's one option as well. So those are a few different ideas that I had. I don't know what's the right one, or maybe it's a combination of all these things. But at the end of the day, here's the problem is no one is gonna like what the solution is gonna be. There's gonna be at least some subset of the population or some demographic that's gonna disagree or not like it, right?
Jacob:So if you are employed and you're young and they increase the tax rate for you, that's not gonna be fun because you're gonna get to take home less income. If you are retired and you're receiving your benefits and they're like, we're just gonna cut benefits across the board. You're not going to like that because you're probably at least in some part relying on that income. If you reduce your COLAs, well, then you're not going to get the increases to stay up with inflation. So there's really no perfect solution here.
Jacob:And I wanted to look at the report and see if they had any suggestions. And they actually say that to illustrate the magnitude of the seventy five year actuarial deficit, consider that for the combined OASDI trust funds to remain fully solvent through the seventy five year projection period, which ends in 2098, you have three options. Revenue would have to increase by an amount equivalent to an immediate and permanent payroll tax increase of 3.33 annually to 15.73. So that's one option. And so what that's referring to is the 12.4% rate that we're paying currently for OASDI insurance per our taxes.
Jacob:That rate would have to go up to 15.73 to make it immediately solvent through 2098. And that new tax would have to actually go up beginning in January 2024, which is now behind us. So that's a really large jump of 3.33% to help make that possible. So that's one option they said. Number two is scheduled benefits would have to be reduced by an amount equivalent to an immediate and permanent reduction of 20.8% applied to all current and future beneficiaries.
Jacob:So people receiving social security benefits effective January 2024. So one way to make the whole program solvent is to cut everyone's benefits that are, that's currently eligible, but also anyone in the future by 20.8%. Again, probably not a very popular option. And then the third option that they said was we could just have some combination of these approaches that would have to be adopted. So those are some different options that the board of trustees is actually recommending or saying, hey, if we do this, we can make it completely solvent and funded through 2098, which is the time horizon we're looking at.
Jacob:But they also go on to say that if substantial actions are deferred for several years, significantly larger changes would be necessary if action is deferred until the combined trust fund reserves become depleted in 2035. So what it's saying is, is we have had the least amount of impact on any particular group, now is the time to make the changes rather than continue to kick the can down the road because larger or more significant changes will have to take place once we get closer to that 2035, mark. So a lot there, but I would kind of bring it home by saying this, you know, what are my thoughts? We have a problem first of all, and the first step in figuring out a solution is admitting that we have a problem. So I would also say this, I really highly doubt that benefits are gonna be reduced for those who are already receiving them or are of a certain age.
Jacob:So for example, they could say anyone that was born before 1970, you're grandfathered into the current system as we know it, everyone after, you have a different set of rules or different calculation for your social security benefits in the future. Why do I think that this is highly unlikely that they actually cut benefits for retirees? Well, to be honest with you, think there would be a revolt. I mean, would be mass chaos if we came down and said that, hey, we're gonna reduce your income by 20% or 25% forever. And the reason that that would be a major problem is because a 2020 report from the National Institute of Retirement Security said that 40% of older Americans rely solely on social security for retirement income.
Jacob:So 40% of older Americans rely solely on their social security benefits. The report goes on to say after that, it said, that about half of the population 65 and older live in households that receive at least 50% of their family income from social security benefits. So again, those people are not necessarily reliant on social security, but a large chunk of their income does come from it. So too many people need it to survive and kind of continue their same standard of living, even if it is not necessarily the highest standard of living. 40% of Americans that are older are relying solely on social security benefits to get them to the next month.
Jacob:So that's why I highly doubt that, they're gonna just cut benefits across the board. I think, some of the options I talked about earlier, one here might be, to reduce benefits for those who don't need it or those who have a certain income. But I personally believe that tax increases on workers will probably be one of the primary ways that this issue gets corrected or shored up. But I really think it's gonna be a combination of a lot of the things we've talked about. A combination of, you know, maybe increasing taxes slightly, changing benefits for people after a certain year of birth, Perhaps reducing benefits for those who don't need it based on their income or some sort of income based benefit provision.
Jacob:So here's maybe what I'm thinking. I think that FICA taxes will increase slightly. I think the income cap for FICA taxation will be raised or perhaps done away with completely. The first eligible filing age could be pushed back beyond 62. And then the calculation for benefits for Americans born after a certain year, they could be different or change slightly resulting in a lower benefit for the rest of their lives once they do reach eligibility.
Jacob:So I think a combination of all those things would maybe be the best way to fix the issue and the least impactful way for almost every age group or demographic. So if you wanna spread out the pain over the whole population, perhaps a combination like that might be beneficial rather than one group or another. So again, I have no idea what I'm talking about. I reserve the right to be wrong on all of this. So we're gonna just see what the future holds and see what happens.
Jacob:But I think that the the biggest hurdle in all of this is the fact that politics are involved and none of these changes will be appreciated by any particular group of people here in America. And I think that really comes down to who wants to be the bad guy and who's gonna be the person to raise taxes or reduce benefits. That's really what's gonna have to happen here, and I think that at some point we as Americans have to be okay with something that we don't like getting pushed through in terms of, new laws created or new rules for us. So because politics are involved, I think that this is gonna continue to get kicked down the road and, it'll actually be something that gets taken care of in the eleventh hour. So this will continue to be a waiting game for us to see, hey, what's gonna happen here?
Jacob:And I think that the anxiety around it might end up continuing to be there for a few more years. And so just don't expect this to go away overnight, no matter who the president is or isn't or who is in Congress or not in Congress. I think that nobody wants to be the person that says higher taxes or reduced benefits. And that's really the problem as well. So with all of that said, how should you make or change your decisions around Social Security as a retiree or someone who's close to retirement?
Jacob:The first thing I'd say is secure your own retirement yourself. So do that through your savings, your investments. Don't rely solely on Social Security. And the reason I say that is because Social Security in the beginning, it wasn't designed to be a primary source of income for a retiree. It's designed to be supplemental per the name, right?
Jacob:So it's designed to, be a supplemental source of income to help avoid poverty for older Americans towards the end of their lives. And so the system has kind of evolved and changed over time. And my job is to help you max out your benefits as much as possible. So I'm not denying that. But at the same time, I think way too many people are relying solely on the government or the systems that the government has provided as their way of retirement in the future or their way of income in the future.
Jacob:So I would say, it might be hard to hear, but I would say put the blame on yourself, like figure it out for yourself, secure your retirement yourself, and don't rely on someone else or some other entity to help take care of you in the future. So that's the first thing, probably hard to hear, but it is my recommendation. Number two is make the best decisions based on the information you have right now. So we can play the what if game all day. We can play what if Social Security goes away tomorrow?
Jacob:What if it goes away in twenty years? All those different things and we can try to factor that into a retirement plan. What I would say is this, all of it's written in pencil and it's going to change at some point. So all we can do is make the decisions that we know to be best for ourselves based on the information we have right now today. And then we can adjust or make changes in the future as we're allowed to or as we can.
Jacob:So really all you can do is take what information you have, make the best decision you possibly can based on that current information and maybe insightful wisdom looking forward in the future of potential options for what's gonna happen here, and then go with it. So don't play the what if game, you'll get analysis paralysis you'll run into, you'll never make a decision, and you'll always be fearful of making the wrong decision. And then finally, here's maybe a different thought for you. I would say maybe build two plans. So I would build a retirement plan including your social security projections and your benefits, but then I'd also build a second plan without any social security included in that plan.
Jacob:And the reason I say do this is if you want to see how much you're, relying on on social security in the future in terms of a complete and full retirement of never running out of money, then what you'll see here is you'll have a difference. You'll have a difference in terms of like a percentage of probability of success. And again, probabilities of success are not the end all be all, but it does kind of give us an indication or it's a litmus test of how we're doing in the kind of the direction we're going. So if you have Social Security included in your plan and it says 95% chance of success and you have the other plan where Social Security is not included at all, and it says, you know, 20% of success, well, there's a big gap there. And so I say make two plans and then you can evaluate the difference there between those two things for yourself.
Jacob:And if there's a really big gap, that means you have more risk when it comes to Social Security perhaps running out of money or Social Security actually reducing benefits. So the larger the gap, the greater the risk for you and your situation. If that gap is fairly small, then you'd actually don't have a huge risk towards any of this anyway. So that's my three things. I would say secure your retirement yourself through proper investing and proper savings and doing things really well for a long number of years.
Jacob:Make sure you're ready for retirement. And the second thing is, is make the best decision you can with the information you have right now. Don't play the what if game. And then finally, perhaps build two plans, one with social security projections and one without and see what the difference is there on your chances of success moving forward. So that's what I would say, maybe some thoughts for you there.
Jacob:Now, here's one thing that's gonna come up in your mind and maybe what everyone is saying is take it at 62 so you can get what you can while you can because this thing's going to bust and it's not gonna work, right? I would avoid making any rash decisions during these kind of unknown or uncertain times. I would avoid taking your Social security at 62 just so you can get what you can while you can. I understand the thought, but it is counterintuitive and here's why. If they cut benefits in the future, those percentage cuts that we were talking about earlier, perhaps whether it be 20% or whatever it ends up being, they're going to be based on what you're receiving at the time.
Jacob:And if you take your benefits at 62, you're already going to be getting a 30% reduction based on what your full benefit would have been at your full retirement age. And so if you take a reduction to take it at 62 and then they make a reduction in the future because it's the only way to shore up the system and make it continue to work, then you're going to be getting two reductions and then you're going to be getting way less income than you ever thought you would. So it would probably be smarter to maximize your benefits to help, eliminate some of the risk here, so that any future reductions wouldn't hurt you as badly. So that's the first thing is don't take it at 62 simply to get what you can while you can, because it would be counterintuitive to what you actually think might be helping you. Also, say don't take Social Security at 62 if your plan does not suggest it.
Jacob:And here's why. If you've got $2,000,000 in tax deferred accounts, it's probably gonna be smarter for you to use your gap years to do some tax planning, perhaps Roth conversions, perhaps just a normal spin down strategy to lower those tax deferred accounts. So you have a future risk of RMD taxes being a lot lower than you would if you didn't do any tax planning here. So why would I say don't take it at 62? Well, if you take your benefits at 62, what happens is, is that income is now going to be showing up on your income tax return, which ultimately says, hey, I can do less in Roth conversions at these lower tax brackets because they have this portion being filled up by Social Security.
Jacob:But then also if you're not doing any Roth conversions, you might be doing a spend down strategy, meaning you're spending your tax deferred account balances at those lower rates, in the early stages to help reduce your RMDs in the future. So And if you're doing that, that means you're going to be taking less money from your tax deferred account balance because you've got a big chunk of it filled up by social security. So if your plan doesn't suggest to take, your benefits at 62, then probably don't. Some of these other things here are going to be important. And the really, the big picture here is that you need to consider all of it.
Jacob:What is your total net benefit or total net dollars gained by taking it at 62 versus taking that 65 or 67 or perhaps even 70 whenever you factor in your savings as well. So my parting words for you might be just to avoid any rash or emotional or fear based decisions around when you should take Social Security and just kind of your plans for it. All you can do is make the best decision you can with the information you have. And so build your plan and follow it. That'll be right my recommendation for you.
Jacob:Hopefully this conversation was helpful as you kind of navigate some of these fears or unknowns or worries that you might have around Social Security. If it was, I'd love to hear about it. You can leave a comment there on YouTube or you can leave a rating and review on Apple Podcasts or Spotify. Would love to hear about how the show has been impactful or positive for you if you are enjoying it. Thank you so much for being here with me.
Jacob:We will see you next week. Hey, it's Jacob again, and I wanted to extend a quick offer to you. If you have a question and you would like to have it answered here on the show, please email me at jacobretirementanswers dot net. And I'd love to answer that question for you right here on the show. Also, wanted to remind you that nothing discussed in today's episode is meant to be financial, legal, or tax advice.
Jacob:Retirement Answers is for educational purposes only. Thanks for tuning into this week's episode. I look forward to talking with you again next week.
Creators and Guests
