OK, OK, OK, the Social Security Trust Fund is insolvent. Or…it’s going to be insolvent…or maybe not…but not until 2037. Enough already! On any given day you can scour the Internet for horror stories of how Social Security “isn’t going to be there” when I retire. And often times, current retirees have the mistaken belief that the benefit will be taken from them.
Let’s review the facts:
1.“Full Retirement Age” (when one can claim full benefits) is being slowly increased from age 65 to 67. This shift began in 2000, and is happening over a 22 year period.
2. Most benefits are subject to income tax.
3. High-income earners receive the largest dollar payments, but low income earners receive a larger percentage of their income. In other words, low income earners have earned a greater return on their Social Security tax payments than higher earners.
4. For most Americans, the Social Security tax is the single largest tax that they pay. Currently, it’s a flat tax on the first $106,800 of income that you earn.
5. Social Security is “funded” by a 12.4 percent tax on earnings (paid half by the employer and half by the employee). The current administration imposed a temporary reduction of 2 percent (hlaf by the employer, half by the employee).
6. For years (essentially since the program was incepted in 1937), we have been collecting more than we’ve paid out. So each year, some of that revenue goes to pay benefits and the excess receipts go into the “Social Security Trust Fund.”
7.The Trust Fund as basically an account which invests its money in US Treasury bonds.
8. Starting in or around 2016, the 12.4 percent current tax revenues will not be enough to pay 100 percent of current benefits. They will need to start using the interest income from the bonds to pay benefits (in addition to current receipts).
9. In 2024, benefit costs will exceed Social Security’s tax revenues (the 12.4 percent) plus Trust Fund income (the bond interest). As a result, the program will need to begin selling some of its investments (the Treasury Bonds) to pay benefits.
10. In 2037, all the bonds (the current “surplus”) will be gone. (The lockbox will be empty…) Social Security will be depleted. At that point we will only be able to pay 78 cents on the dollar (using the 12.4 percent tax income each year) and it will become worse as we go.
Finally, most people view the Trust Fund, and it’s investment in “Special Purpose” Treasuries as being “worthless”. That’s a half-truth. The fact is, the government spends every dime that the Trust Fund loans to it, so anytime the Trust Fund needs to redeem funds, the government must issues an equal amount of marketable Treasuries to cover that redemption. So, in essence, regular income taxes and federal borrowing goes towards funding the Trust Fund. It’s a confusing accounting gimmick that will essentially result in further government borrowing as time goes on.
There you go. The big ticking time-bomb. So then, one might ask, “what do we do to fix it?”
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Robert C. Henderson is the President of Lansdowne Wealth Management in Mystic, CT. His firm specializes in financial planning and investment management for individuals approaching retirement or already in retirement, with a focus on the particular needs of women that are divorced or widowed. Mr. Henderson can be reached at 860-245-5078 or bhenderson@lwmwealth.com. You can also view his personal finance blog at http://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.
