Every year, the Trustees of the Social Security Trust Funds release a report to Congress on the current financial condition and projected financial outlook of the program. This year’s report, released on July 28, contains valuable information about the health of Social Security that may help you understand how your Social Security benefits might be affected.
What are the Social Security Trust Funds?
The Social Security program consists of two parts. Retired workers, their families, and survivors of workers receive monthly benefits under the Old-Age and Survivors Insurance (OASI) program; disabled workers and their families receive monthly benefits under the Disability Insurance (DI) program. The combined programs are referred to as OASDI.
Each program has a financial account (a trust fund) that holds the Social Security payroll taxes that are collected to pay Social Security benefits. Other income (reimbursements from the General Fund of the Treasury and income tax revenue from benefit taxation) is also deposited in these accounts.
Money that is not needed in the current year to pay benefits and administrative costs is invested (by law) in special Treasury bonds that are guaranteed by the U.S. government and earn interest. As a result, the Social Security Trust Funds have built up reserves that can be used to cover benefit obligations if payroll tax income is insufficient to pay full benefits.
What are some highlights from this year’s report?
- OASI Trust Fund and the DI Trust Fund will have sufficient reserves to pay full benefits on a timely basis until 2034 and 2016, respectively.
- Beginning in 2020, annual costs will exceed total income, and the U.S. Treasury will need to redeem trust fund asset reserves.
- The combined trust fund reserves will be depleted in 2033 if Congress does not act before then.
- Once the trust fund reserves are depleted, payroll tax revenue should be sufficient to pay about 77% of scheduled benefits.
- So 20 years from now, if no changes are made, beneficiaries may receive a benefit that is about 23% less than expected
- The DI Trust Fund reserve is projected to be depleted in two years. Once the reserve is depleted, income to the fund will be sufficient to pay only 81% of DI benefits.
What is being done to address the financial challenges Social Security faces?
For years, the Trustees have been urging Congress to address the financial challenges in the near future, so that solutions will be less drastic and may be implemented gradually, lessening the impact on the public. As the conclusion to this year’s report states, “The Trustees recommend that lawmakers address the projected trust fund shortfalls in a timely way in order to phase in necessary changes gradually and give workers and beneficiaries time to adjust to them. Implementing changes soon would allow more generations to share in the needed revenue increases or reductions in scheduled benefits. Social Security will play a critical role in the lives of 59 million beneficiaries and 165 million covered workers and their families in 2014. With informed discussion, creative thinking, and timely legislative action, Social Security can continue to protect future generations.”
Some long-term reform proposals on the table are:
- Raising the current Social Security payroll tax rate (according to this year’s report, an immediate and permanent payroll tax increase of 2.83 percentage points would be necessary to address the revenue shortfall)
- Raising the ceiling on wages currently subject to Social Security payroll taxes ($117,000 in 2014)
- Raising the full retirement age beyond the currently scheduled age of 67 (for anyone born in 1960 or later)
- Reducing future benefits, especially for wealthier beneficiaries
- Changing the benefit formula that is used to calculate benefits
- Changing how the annual cost-of-living adjustment for benefits is calculated
You can view the 2014 OASDI Trustees Report at www.ssa.gov.
At this point, these are just proposals, however, if you have questions or concerns about what these possible changes could mean to your own retirement plans, please don’t hesitate to give me a call.