Retirees often worry that Social Security is going to run out of money, and will not be able to pay benefits as promised. Uncertainty about the future prospects of the Social Security program may result in people claiming their benefits early, even though Social Security has measures in place to prevent beneficiaries from taking benefits prior to Full Retirement Age (FRA).
The Social Security trust fund is actually an accounting mechanism which requires annual accounting and reporting by the Social Security Board of Trustees to Congress. For many years, the program took in more revenue (via payroll tax) than it paid out in benefits. These excess contributions were invested in U.S. Treasuries, which are risk-free.
In their 2020 report, the Board is projecting that the program will be running at a deficit starting in 2021, and the fund will be depleted by 2035. By law, once the trust fund’s assets are exhausted, the program cannot pay out more in benefits than it receives in income. If Congress takes no action over the next 15 years, annual payroll tax revenue from the workforce will cover just 76% of all scheduled benefits.
The good news is that Congress has 15 years to act, and they have always taken actions to shore up the program in the past. Most notably, they passed the Social Security Amendments of 1983, which extended the life of the program by more than half a century. Congress has many tools at their disposal, such as increasing payroll taxes, tying the Full Retirement Age to life expectancy, or means-testing benefits. In Mr. Biden’s proposed tax plan, he would apply the payroll tax on earnings exceeding $400,000, which would generate an additional $808B in revenue over ten years.
We expect Congress to strengthen the program prior to the trust fund being exhausted. About 65 million Americans are currently receiving retirement, disability or survivor’s benefits through Social Security. Among the elderly, Social Security payments make up more than half of total income for 50% of married couples, and 70% of unmarried people. With that being said, making changes to extend the program is an assured vote getter.
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