When Will Social Security Run Out?
Most of us have been paying into the Social Security program our entire working life. We’re counting on receiving some of that money back in retirement, but headlines warn us that the Social Security trust fund is set to run out of money around 2034.
As aging baby boomers retire, there are fewer workers paying into the program to support the rising cost of benefits. As of last year, there were just 2.7 workers paying into the system for each person drawing Social Security benefits.
Does this mean you should grab your retirement benefits as soon as possible?
Social Security benefits specialist Mary Beth Franklin suggests the following:
“While there may be good reasons to file for reduced Social Security benefits early, claiming Social Security prematurely out of fear is a bit like selling stocks in a down market: All you’ve guaranteed is that you’ve locked in a loss. And if future benefit cuts did materialize, the benefits of those who claimed as soon as possible would be reduced even further.” — Mary Beth Franklin, InvestmentNews
Social Security’s Future: Changes, Sustainability, and Depletion Dates
The Social Security Administration has said that future changes to the program are certain, and that those changes should reflect the “desires of each new generation.” And the program has been shored up by lawmakers in earlier eras, which gives the Social Security Administration confidence that the program could be fixed before the 2034 depletion date
While we don’t expect Social Security to go bust, we do expect it will need to change in the years ahead. As its trustees have reported:
“Social Security is not sustainable over the long term at current benefit and payroll tax rates … [and] trust fund reserves will be depleted by 2034.”
First, “depleted” does not mean the Social Security Administration will shut down and stop paying scheduled benefits. It means the program’s trust fund reserves could run out by then. There are still payroll taxes and other sources to cover more than 77% of the program’s scheduled benefits.
So, worst case, if trust fund reserves run out, we’re forced to make hard choices for the roughly 23% shortfall starting around 2034.
Projections for Future Social Security Benefits
Admittedly, the Social Security system is between a rock and a hard spot. Nobody wants benefit reductions or to face increased payroll taxes just to preserve the status quo. But if we don’t do something to shore up the Social Security Trust Funds, the options will likely only worsen.
Politicians have a strong incentive to reform Social Security. As Buckingham Strategic Partners retirement planning specialist Jeffrey Levine has observed:
“My gut sense is that practically no politician in America would ultimately be happy having to explain to voters why they let Social Security collapse on their watch … That’s not a great message to have to bring to voters, especially older voters who show up at the polls in the greatest numbers.”
As members of Congress wrangle over the “best” (or least abhorrent) solutions to continue paying scheduled benefits, they have been submitting proposals behind the scenes, and the Social Security Administration has been opining on the estimated effect for each.
Only time will tell which proposals become legislated action, but like all budget issues, there are only two solutions: We can pay more in, or we can take less out. Most likely, we’ll need to do a bit of both to extend the Social Security program.
Ways To Balance Social Security’s Budget
To keep the Social Security trust funds solvent, Congress could:
Raise the income limit on wages subject to Social Security taxes: As of 2023, earnings beyond $160,200 per year are not subject to Social Security taxes. They may increase this income limit or eliminate it entirely. Or reinstating it for income beyond certain high-water marks.
Increase the payroll tax rate for some or all workers: Currently, employers and employees each pay in 6.2% of their wages, for a total 12.4% up to the aforementioned wage cap. As cited in a September 2022 University of Maryland School of Public Policy report, “73% (Republicans 70%, Democrats 78%) favored increasing the payroll tax from 6.2 to 6.5%.”
Increase Social Security taxes on payouts, and direct those funds back into the program: Currently, if your “combined income” exceeds $44,000 on a joint return ($34,000 on an individual return), up to 85% of your Social Security benefits are taxable, as described here. Anything is possible, but taxing retirees more heavily seems less politically palatable than some of the other options.
Identify new funding sources: For example, one recent bipartisan proposal would establish a dedicated “sovereign-wealth fund” seeded with government loans. Presumably, it would be structured like an endowment fund, with an investment time horizon of forever. In theory, its returns could augment more conservatively invested Social Security trust fund reserves. Other proposals have explored a range of potential new taxes aimed at filling the gap.
Cutting Benefits
We could also cut back on Social Security spending. Some of the possibilities here include:
Reducing benefits: Payouts could be cut across the board, or current bipartisan conversations seem focused on curtailing wealthier retirees’ benefits.
Extending the full retirement age: There are proposals to extend the full retirement age for everyone, or at least for younger workers. This would effectively reduce lifetime payouts received, no matter when you start drawing social security retirement benefits.
Tinkering with COLAs: There are also bipartisan conversations about replacing the benchmark used to calculate the Cost-of-Living Adjustment (COLA), which might lower these annual adjustments in some years.
These are just a few of the possibilities. Some would impact everyone. Others are aimed at higher earners and/or more affluent Americans. It’s anybody’s guess which proposals make it through the political gamut or what form they will take if they do.
Should You Take Your Social Security Early?
So, should you start drawing Social Security benefits sooner than you otherwise would? An objective risk/reward analysis helps guide the way.
Many feel “safer” taking their Social Security benefits as soon as possible to avoid losing what seems like a bird in the hand. However, the appeal of this approach is often fueled by deep-seated loss aversion. Academic insights suggest we dislike the thought of losing money about twice as much as we enjoy the prospect of receiving more of it. We tend to cringe more over a potential loss of promised benefits than we factor in the substantial rewards we stand to gain by waiting. Put another way:
You’re not reducing your financial risks by taking Social Security early. You’re only changing which risks you’re taking. In exchange for an earlier and more assured payout, you’re also accepting a permanent, cumulative cut to your ongoing Social Security benefits.
If this still seems like a fair trade-off, consider that Social Security is one of the few sources of retirement income ideally structured to offset three of retirement’s greatest risks:
- Life expectancy risk: In an annuity-like fashion, Social Security benefits are structured to continue paying out, no matter how long you and your spouse live.
- Inflation risk: The payouts are adjusted annually to keep pace with inflation.
- Market risk: Even in bear markets, Social Security keeps paying, with no drop in benefits.
In short, if you are willing and able to wait a few extra years to receive a permanently higher payout, you can expect to better manage all three of these very real retirement risks over time.
This is not to say everyone should wait until their Full Retirement Age or longer to start taking Social Security. When is the best time for you and your spouse to start drawing benefits? Rather than hinging the decision on uncontrollable unknowns, we recommend using your personal circumstances as your greatest guide. Consider the retirement risks that most directly apply to you and yours, and chart your course accordingly.
