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Will Social Security be there when I retire?
The short answer is, “yes.” The long answer is, “in some form.” The sustainability of Social Security in the United States is a topic of considerable debate, and its future depends on several factors, including demographic shifts, economic conditions, and legislative action. The bottom line is something has got to change. Let’s get into it!
How is Social Security funded?
- Social Security is funded primarily through payroll taxes (FICA), where workers and employers each contribute 6.2% of earnings, up to a certain income limit. This system is based on a pay-as-you-go model, where current workers’ taxes fund the benefits of current retirees.
- In theory, the Social Security Trust Fund should be sustainable as the economy grows, as more people enter the workforce, and as wages rise.
So, what’s the problem?
- The Social Security Trust Fund, which holds surplus funds accumulated from payroll taxes, is projected to be depleted by 2034-2035. After that, incoming payroll taxes will only be enough to cover about 77%-79% of benefits. Yikes!
Why is this happening now?
- In a word … demographics. The aging population, declining birth rates, and longer life expectancy are all contributing to the funding gap. This combination reduces what’s going into the fund and increases what’s coming out. Not good.
How is the Social Security challenge going to be resolved?
Several proposals are on the table to address the sustainability of Social Security, including:
- Raise the Retirement Age: As life expectancy increases, raising the age at which people can begin receiving Social Security benefits could help reduce the burden. This approach was used in 1983 when, during the last major Social Security overhaul, the full benefits age gradually increased, from 65 to 67. There are similar proposals now, with one pushing for a full retirement age of 70 for those born after 1977—the rationale being that people are generally living longer and therefore also working longer.
- Increasing Payroll Taxes: Currently, the payroll tax that funds retiree benefits is 12.4% of workers’ earnings, split evenly between employer and employee. There are many proposals to increase that amount, such as by a fraction of a percentage point annually over several years to lessen the impact on the average worker.
- Raise or Eliminate the Payroll Tax Cap: Currently, income over $168,600 (as of 2024) is not subject to Social Security taxes. Raising or eliminating this cap would increase revenue.
- Adjusting Benefit Formulas: Reducing benefits for higher-income earners or slowing the growth of benefits could help extend the life of the system.
- New Tax Sources – Another option is to tax investment income to fund Social Security or increase estate and gift taxes.
- New Investment Structure – Social Security funds are now 100% invested in U.S. Treasury bonds, which are very safe but offer a relatively low rate of return. One idea is to put some portion of Social Security taxes into a newly created sovereign wealth fund that would invest in stocks and have the potential to earn a higher rate of return.
As you can see, there are a lot of options, proposals, and solutions out there. To me, it’s not a matter of “if”. It’s more a matter of “when” and “how”. Social Security is a vital safety net for millions of Americans. It’s a non-negotiable, must have, and the need for Social Security reform is widely acknowledged. Achieving a solution that balances fairness, political feasibility, and financial stability is where the real challenge remains. My hope is that we, as a country, address this challenge sooner than later. The longer we wait, the harder it will be.
