How Safe Is Social Security?

There are several myths going around about the safety of Social Security, or, more specifically, the lack thereof. For example, have you heard that Social Security is broke, or that the government raided the Social Security trust funds?

Fortunately, these aren't accurate, but there is still legitimate cause for concern about Social Security's future. Here's the good news and bad news about Social Security's financial condition, and whether Social Security benefits are safe or are at risk of being cut.

Older couple at a table, looking at paperwork.
Older couple at a table, looking at paperwork.

Social Security is an important source of retirement income for millions of American seniors. Image source: Getty Images.

Two Social Security myths -- busted!

To discuss the safety of Social Security, we need to clear up two common Social Security myths.

First, Social Security is not broke or bankrupt, nor is it in danger of going broke anytime soon. In fact, the program ended 2016 with $2.85 trillion in reserves. At the current rate benefits are being paid out, that means Social Security could afford to pay benefits to all retirees for approximately three years even if no more payroll taxes were collected.

Of course, payroll taxes are being collected. Lots of them. In fact, the Social Security program was able to cover all of its expenses last year without tapping into its reserves, and it even added $35 billion to the trust fund. These surpluses are expected to continue through 2021, so you can expect the reserves to grow even higher in the coming years.

The other common myth you may here is that "Social Security doesn't actually have any money -- the government raided its reserves and left nothing but IOUs," or something to that effect.

To be fair, this one is partially true. The Social Security trust fund isn't just a pile of cash sitting in a warehouse somewhere. The Social Security Administration (SSA) invests the money to generate an additional stream of income, specifically in special government bonds.

In principle, this is no different than if you took some of your retirement savings and bought U.S. Treasury bonds. Is your 401(k) a pile of cash stashed in a safe deposit box? Of course not -- that wouldn't be a smart retirement strategy. For this reason, I would argue that it would be fiscal mismanagement if the SSA didn't invest Social Security's reserves. In fact, the investment income generated is what allowed the system to run a surplus last year.

The bad news

But it isn't all good news when it comes to Social Security's finances. Thanks to the ongoing retirement of the baby boomer generation and ever-increasing life expectancies, the ratio of workers to Social Security recipients is expected to decline in the coming years.

Starting in 2022, the expected result is that the Social Security program will begin to run a deficit, which is expected to continue and get worse as time goes on. In 2034, the trillions of dollars in Social Security's reserves will have been completely depleted.

Having said that, there's a third common myth that we can address. If Social Security's reserves run out, the program and its benefits won't simply cease to exist. Payroll taxes will still be collected, and this incoming revenue will still be enough to cover 77% of Social Security's promised benefits. While an across-the-board cut like this would certainly be devastating to millions of retirees, it's far better than having those monthly checks disappear altogether.

Could Social Security be cut?

To be clear, there are only three things that can be done to deal with Social Security's expected financial problems:

  1. Do nothing and allow benefits to be cut by 23% once the reserves run out.

  2. Raise taxes to generate more income.

  3. Cut benefits in other ways (such as increasing the full retirement age) to reduce Social Security's outflows.

The first option isn't likely. The overwhelming majority of Americans feel that Social Security is a vital program and that preserving it for future generations is extremely important. Plus, history tells us that something will be done to fix Social Security's finances.

Of the other two options, it may surprise you to learn that raising taxes is by far the more popular approach, even among all income groups, age groups, and political parties. And raising taxes could mean an across-the-board tax increase or eliminating or increasing the taxable wage cap, or some combination of the two. In fact, a 2-percentage-point tax increase and elimination of the wage cap could fix Social Security with no other necessary changes.

On the other hand, not only are benefit reductions in any form highly unpopular, but they would also be less effective at solving the problem. For example, a study by the National Academy of Social Insurance found that increasing the full retirement age to 68 would only close 16% of the funding gap, and means-testing Social Security benefits would only take care of 20% of the problem.

In addition, President Trump has promised not to reduce Social Security benefits for seniors. It's entirely possible that he won't stick to his promise, or that his successors won't feel the same, but it seems more likely that the eventual way Social Security will be fixed will be tax increases, not benefit cuts.

So, how safe is Social Security?

The bottom line is that Social Security is safer than most naysayers would have you believe. The program is completely safe through 2034, and with some relatively small tax changes, it could be brought to permanent solvency. Even if the program was allowed to completely run out of reserves, this worst-case scenario would result in across-the-board benefit reductions of 23%, although I don't see that happening.

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