The Social Security Board of Trustees recently released its 2017 report outlining the projected future of the program. Unsurprisingly, the landscape has not changed much since last year, meaning significant cuts to benefits may be necessary unless Washington can agree on some solutions in the coming years.
When might Social Security reserves run out?
The combined overall trust fund reserves are projected to be depleted in 2034, the same finding as in last year’s report. At that point, Social Security on the whole will only get enough revenue to cover 77% of scheduled benefits through 2090, before dropping to 73% in 2091.
Breaking that down by the type of benefit, for the Old Age and Survivors Trust Fund, which covers Social Security benefits that older Americans and their families receive, 2035 is still the date at which that portion of the overall program will run out of money, with enough income at that time to cover 75% of payments. The depletion date for the Disability Insurance Trust Fund is now 2028, extended from last year’s estimate of 2023 (due in large part to lower recent incidence rates), with enough income at that time to cover 93% of what it owes beneficiaries.
What can be done to close the gap?
As in previous reports, the trustees offer some ideas on how to close the shortfall between Social Security’s long-term financial obligations and its current financial resources.
- Tax increases. One immediate solution would be for the government to increase the current payroll tax that goes toward Social Security. In order to cover 100% of future benefits over the next 75 years, the government would have to increase the total 12.4% tax (employees currently pay 6.2% on the first $127,200 in wages that they earn, with employers matching that amount with a 6.2% tax of their own) by 2.76 percentage points, bringing the overall total to 15.16%.
- Benefit cuts. Alternatively, benefits could be trimmed. If lawmakers acted right now to reduce all benefits — including those that current Social Security recipients get — then it would take a 17% cut to get the job done. If the reduction were applied only to future beneficiaries, the cut would have to be 20%.
If nothing is done to improve the situation until 2034, the trustees observe that it would take either a payroll tax increase of almost 4 percentage points or an immediate benefit reduction of 23% to close the funding gap at that point.
What solutions are being considered?
Several proposals have been introduced in Congress this year to improve Social Security’s long-term solvency. This has traditionally been a sensitive issue from a political standpoint. A combination of tax increases and benefit cuts might be a more politically palatable way to approach the subject.
Not surprisingly, 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.” They point out that “implementing changes sooner rather than later would allow more generations to share in the needed revenue increases or reductions in scheduled benefits and could preserve more trust fund reserves to help finance future benefits.”
According to the trustee report, Social Security paid benefits of $911 billion in calendar year 2016, and there were about 61 million beneficiaries at the end of the calendar year.
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Retirement Research, Invesco Consulting
Senior Analyst Jon Vogler draws on extensive pension expertise to offer retirement thought leadership for Invesco. In addition to writing Invesco’s Retirement blog, he tracks legislative and regulatory developments and contributes as a writer and editor to a variety of retirement-related Invesco communications.
Prior to joining Invesco in 2008, Jon spent more than 25 years in the research, writing, compliance and underwriting areas of the retirement services industry, including roles as a senior consultant at Mutual Benefit Life’s pension consulting firm and as a compliance manager in the Automatic Data Processing retirement services division.
Jon earned the Fellow, Life Management Institute (FLMI) and Competent Toastmaster (CTM) designations. He has a B.A. in History from Rutgers, The State University of New Jersey.