Social Security is going broke… right?

Over the last 10 years, I have given hundreds of live Social Security presentations. By far, this is the most frequently asked question concerning Social Security: “Is Social Security going broke?”.

The second most asked question I get is:

“How much longer do you think Social Security will be around?”

Our Social Security system does have a long-term funding issue. The solution to fixing Social Security’s funding issue is very simple, but simple isn’t always easy.

Every year, the Social Security Board of Trustees releases a report with updated projections on the long-term condition of our Social Security system. One of its main focuses is on the ability of Social Security to meet all of its financial obligations over the next 75 years. In June 2022, the Board of Trustees released their latest report with its latest projections, including things that can be done to fix the shortfall.

78% of Future Retirees Are Worried About Social Security Running Out of Money

Most people in this country believe that Social Security is in a great deal of trouble. They believe it is even on the brink of bankruptcy. In fact, in a recent survey, 78% of future retirees were worried about Social Security going broke. They worry about its ability to make benefit payments for as long as they live in retirement. Younger people, who are decades away from retirement, worry whether Social Security will exist when it is time for them to retire. Reading the latest Trustee’s Report should put most of those worries to rest.

Social Security Is Going to Be Around For A Long Time

Social Security is going to be around in one form or another for a long time. Probably well into the next century. The worst thing that could happen would be a cut in benefits for everybody. But according to the recent Trustee’s report, that benefit cut would not happen until the year 2035.

In 2035, Benefits Could Be Cut By 20%

If nothing is done, then by 2035 everybody’s benefits would have to be cut by about 20%. In other words, you would receive 80% of what you should have been paid.

Can Make Benefit Payments Through 2096

Once these benefit cuts are made, Social Security can make all benefit payments going forward. That’s right, they can make all of their benefit payments through the year 2096 or almost into the next century. So, the worst thing that could happen is a 20% cut in benefits in the year 2035, growing slowly overtime.

Personally, I don’t think there will be any major benefit cuts for two reasons:

• Number 1: Social Security has been one of the greatest anti-poverty programs in the history of this country.
• Number 2: most politicians want to keep their jobs and stay in office.

In 1959 – 35% Of People Over Age 65 Lived in Poverty

If we go back to 1959, 35% of all people over the age of 65 lived below the poverty line. That is an amazing statistic. In 1959 in the United States of America, 35% of all people over the age of 65 lived in poverty.

Now Only 10% Live In Poverty

Today, that percentage has fallen to only 10%. That is close to the lowest poverty percentage for that age demographic in the history of this country. Why did that percentage fall from 35% in 1959 to only 10% today?

One Reason – SOCIAL SECURITY

One reason and one reason only: Social Security. Some experts estimate if we completely stopped or took away our Social Security program, approximately 45% of all people over the age of 65 would live in poverty. Nobody wants to see that, especially our politicians.

People over 60 are a growing and powerful voice in our political system because a large percentage of them vote.

70 Million People Receive a Social Security Check Every Month!

Currently, over 70 million people receive a Social Security check every month. The vast majority of them are over the age of 60. Most politicians know that if they vote for a bill that includes cuts to Social Security benefits, they will probably be voted out of office. Most politicians want to keep their jobs, and when push comes to shove, I believe they will fix Social Security’s long-term funding issue with small or no benefit cuts. Here’s how they could do that:

Increase FICA Tax

The Trustee’s Report highlights a number of options that could fix the funding shortfall with no benefit cuts for the next 75 years. The total deficit or funding shortfall is 3.4% of taxable payroll. The simplest way to erase that deficit is to increase the payroll tax or FICA tax by a total of 3.4%. That tax increase could be split evenly between employers (1.70%) and employees (1.70%). The current FICA tax for employees stands at 6.2% of earnings, employers also pay the same rate of 6.2%. 

Increasing the FICA tax for both employers and employees by 1.70%, would bring it up to 7.90%. It would also completely eliminate the need for any benefit cuts through the year 2096.

Increase Earnings Cap

The other option that would have the biggest impact on reducing the Social Security funding shortfall involves the earnings cap. In 2023, the earnings cap stood at $160,200. If you earned less than that amount, then you paid FICA taxes of 6.2% on all of your earnings. If you were fortunate enough to have earnings that exceeded $160,200, any earnings in excess of that amount were not subject to any FICA taxes.

Only 6% Earn More Than $160,200

Approximately 6% of all wage earners in this country have earnings that exceed $160,200. Simply eliminating the earnings cap, so that everybody pays FICA taxes on all of their earnings would resolve 75% of the funding issue with no benefit cuts, if the additional earnings do not receive benefit credits, it’s 60% with benefit credit.

Completely eliminating the earnings cap does not appear to be a viable political option, but a combination of the two. Raising FICA taxes a bit and raising the earnings cap without completely eliminating it could be more palatable politically, and could accomplish the goal of eliminating the funding deficit with no benefit cuts for the next 75 years.

Here is how it could work:

Increasing the FICA tax by 1.00% for both employers and employees, from 6.2% up to 7.2%, would resolve about 55% of the long-term funding issue. Just doing this by itself would extend the time before benefits would have to be cut until about the year 2045 instead of 2035 or by an additional 10 years. In addition to the small FICA tax increase, if the earnings cap is increased from its current level of $160,200 in 2023 to approximately $400,000 going forward, that could completely eliminate the deficit with no benefit cuts for the next 75 years.

This is just one potential solution that could be implemented immediately. With this option, everybody plays a part in the solution, but wealthy people play a bigger part. Everybody is affected because FICA taxes would be increased by 1.00% for everyone. Wealthy people will experience a higher tax increase measured in dollars because much more of their earned income will become subject to FICA taxes when the earnings cap is raised from $160,200 to $400,000.

Compromise is Necessary.

Compromise has always been a major part of our two-party political system, although recently compromise has been hard to come by. A good compromise involves both sides making a sacrifice and both sides also receiving a benefit. That is exactly what happens with this proposed fix. The people who are not considered wealthy make the sacrifice of paying more FICA taxes with the 1.00% tax increase, but they also benefit because their benefits will not be cut.

A benefit cut for many of these people could be especially harmful, making it much harder for them to maintain a decent standard of living in retirement. The wealthy also make the sacrifice of paying the higher FICA tax, but make the additional sacrifice of paying that higher tax on more of their earned income with the earnings cap increase to $400,000. They will also benefit because when it comes time to claim Social Security, their benefits are going to be bigger because of the additional FICA taxes they had to pay.

The longer the politicians wait, the more expensive it becomes to fix the system. They need to compromise and fix the system now, in this case, it does not pay to wait. We can’t have social security going broke.