Is Social Security going broke? That is the most frequently asked question I have received over the last 15 years. Most people think that Social Security is in a lot of financial trouble and may eventually go bankrupt and  stop making benefit payments altogether.

Over 70 million Americans Receive Social Security 

Social Security is too important in the lives of too many people for it to go broke. Currently over 70 million people receive a Social Security check every month. For approximately 10 million of the 70 million people who receive a Social Security check every month, their Social Security income is the only source of income they have in their retirement. If Social Security were to stop making benefit payments, not only would that push those 10 million people into the ranks of poverty, but they would probably end up homeless and destitute.

For an additional 10 million people, Social Security provides more than 50% of their retirement income, for many of these people Social Security provides much more than 50% of their income. If Social Security were to stop making benefit payments many of those people would also join the ranks of poverty.

Too many people are either totally dependent or critically dependent on Social Security to provide them with the income they need to maintain their quality of life in retirement.

Many people think that Social Security will run out of money and stop making benefit payments by the year 2034. The reason they believe this is because of an annual report put out by Social Security’s Board of Trustees.

The last time our Government addressed Social Security’s long-term funding issue was in the year 1983. They made a number of changes, but the biggest change was increasing the FICA taxes to 6.2%. The money our Government takes in from those FICA taxes are what it uses to make benefit payments to the people who have already claimed their Social Security benefits. Those FICA taxes are taken from your paycheck every time you get paid.

When they increased those FICA taxes to 6.2%, they knew that for about 30 years they would take in more money from those FICA taxes than they had to pay out in benefits. So, every year for about 30 years, they would have a surplus, which they put into a surplus account. Currently there is approximately 2.5 trillion dollars in that surplus account. But they knew that there would come a day, when the baby boomers started to retire, that they would take in less money from those FICA taxes than they had to pay out in benefits. They also knew that when that day came, in order to continue to pay people their full Social Security benefits, they would have to take money out of that surplus account.

That day has already arrived. For the last several years, Social Security has been withdrawing money from that surplus account to pay current Social Security recipients their full benefits. According to the latest report put out by Social Security’s Board of Trustees, if our politicians don’t address Social Security’s long term funding issue, then in the year 2034, that 2.5 trillion dollars in the surplus account will be depleted, there will be no money left in that surplus account.

According to that latest Trustee report, if our politicians don’t do anything to address Social Security’s long-term funding issue, then in the year 2034, when that surplus account is depleted, they will have to decrease everyone’s benefits by about 23%. If they have to reduce everyone’s benefits in 2034, then they are on sound financial footing and can make all of their benefit payments through the year 2097. That is the worst case scenario.

Too many people interpret this to mean that in the year 2034 Social Security will run out of money, will be completely broke and will have to stop making benefit payments altogether. But Social Security will never completely run out of money. Because of those FICA taxes, that come out of everybody’s paycheck every pay period, Social Security takes in approximately $100 billion dollars every month or over a trillion dollars a year.

Social Security will never run out of money and go completely broke, but if our politicians don’t address Social Security’s long term funding issue, then in the year 2034 they will have to reduce everybody’s benefits by about 23%. If they have to do that, then Social Security is on sound financial footing and can make benefit payments through the year 2097, or almost into the next century. Once again, that is the worst thing that can happen.

I do believe that eventually our politicians will address Social Security’s long term funding issues, and if they do institute some benefit cuts, we don’t expect those benefit cuts will impact people over the age of 55 or 60 years old. We expect that people over the age of 55 or 60 will be Grandfathered and will not be affected by any benefit cuts. People younger than that age would be affected, but because they are younger, they will have some time to make up for those benefit cuts.

I can’t say with 100% certainty that people over the age of 55 or 60 will be Grandfathered, but that is what happened when they last fixed the system in 1983. They did make some benefit cuts in 1983, but people over the age of 60 were Grandfathered and were unaffected by those benefit cuts.

Another thing to keep in mind is that Social Security has kept millions of retirees out of poverty. If we go back to the year 1959, when we first started to keep accurate statistics on poverty in US, here is an incredible statistic. In 1959, 35% of all people over the age of 65 lived in poverty. You read that correctly, in 1959 in the United States of America, 35% of all people over the age of 65 lived in poverty. That is a very high percentage.

Currently only about 9% to 10% of all people over the age of 65 live in poverty. That is the lowest percentage for that age demographic in the history of the United States. Why did that percentage drop from 35% to only 9%, One reason and one reason only, Social Security. Some really smart math people, who are very good at crunching numbers, estimate that if Social Security were to stop making benefit payments, then up to 45% of all people over the age of 65 would live in poverty. 

I don’t think anybody wants to see that happen. Social Security is too important in the lives of tens of millions of people over the age of 65 for it to ever go completely broke and stop making benefit payments.      

The math to fix the system is pretty simple, but that doesn’t mean it is easy. Fixing the system will probably involve a combination of increased taxes and some benefit cuts. But once again, if there are some benefit cuts, I believe there is a very high probability that people over the age of 60 will be grandfathered and not be affected by any benefit cuts.  

Social Security is too important in the lives of too many people for it to stop making benefit payments altogether. In one form or another, we expect Social Security is going to be around for a long time, even making benefit payments into the next century.