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The Peril of Social Security

There’s been more and more talk about Social Security and its feasibility recently, as we get closer and closer to the mid-2030s when the trust fund is scheduled to run out.


I’ve been vocal on this point: If and when the trust fund is actually depleted, Social Security benefits will not stop being paid out.


Unfortunately, the idea that benefits will just STOP is a common belief, and one that’s often circulated because it’s scary, and it feels like theft to a lot of people. Fear and the appearance of wrongdoing are two ingredients that make things exciting. Add in money and the government, and MAN, you’ve got a recipe for a viral post.


But guess what?

A simple understanding of the function of the Social Security system makes it easy to understand why benefits won’t just disappear.


FIRST: Most of us know that we pay into the Social Security system through payroll taxes, and employers match that amount. The amount of income we pay Social Security taxes on is capped at the “Social Security Wage Base,” which is indexed to inflation, so it increases annually. For 2024, that number is $168,600. If you make $170,000, you and your employer pay the social security tax on the first $168,600, but none of it on the remaining $1,400.


NEXT: Once the taxes are collected, they’re deposited into the Social Security trust fund, where they’re invested in government backed securities.


LAST: The benefits are paid out of that trust fund to retired and disabled people. So even if the trust fund goes to $0, benefits would STILL be able to be paid from the taxes that are collected each year.


It’s currently projected that if and when the trust fund runs out, benefits will be paid at a rate of about 80% of what was planned.


So no, don’t worry that there won’t be ANY benefit, but do consider how things might change. Here are a few different ways that they could change the system, so the trust fund doesn’t run out.

  • Increase the Full Retirement Age (happened in 1983).

    • This would effectively delay some people claiming Social Security and keep funds in the trust fund (earning interest) for longer.

  • Decrease benefits (hasn't happened historically).

    • If benefits are decreased immediately, they wouldn’t have to be decreased as much as if the fund runs out entirely.

  • Increase the tax rate (happened in 1977).

    • The current tax rate is 6.2% of wages for employees and employers (12.4% total).

  • Increase the wages that benefits are paid on (happened in 1977 AND 1983).

    • Recent proposals have brought up adding the social security tax on wages above $400,000 for individuals. This additional tax would not increase future social security benefits for that earner, which is how the system currently works (the more you pay in, the more you receive).


Some History

I had to do some research for this part. What I didn’t already know came from I assure you that, although it says “briefhistory” in the url, it is anything but. That’s why I condensed it a bit here.


1935 – Social Security Act is signed into law by Franklin D. Roosevelt. The initial law did NOT include disability insurance, as it does now.


1940 – First monthly benefits were paid to workers and their dependents. At this time, retirement age was 65, and life expectancy was 60.8 for men and 65.2 for women. Ironically, the very first person to receive a monthly benefit check lived to 100 (Ida May Fuller).


1950 – Benefits got their first Cost of Living Adjustment of 77%! Future benefits were also increased dramatically.


1972 – The option to retire early (age 62 for men) and receive a reduced benefit or delay retirement and receive an increased benefit was first introduced.


1975 – The trustees of the trust fund found that the fund would be depleted by 1979 if there was no change.


1977 – Changes were made to address the shortfall. These included increasing the payroll tax from 6.45% to 7.65%, increasing the wage base, and changing how cost of living adjustments were calculated.


1983 – Changes were again made to address a shortfall. These included, but were not limited to:

  • Increasing payroll taxes on self-employed workers to match the employee/employer rate

  • Made certain amounts of benefits taxable

  • Pushed the Full Retirement Age to 67 from 65


I skipped a lot of big changes related to disability and Medicare benefits and many, smaller changes since 1983.


The point I wanted to get across is this: Changes have been made to continue paying Social Security benefits. History can be a guide for us to think about the likelihood of different ways the government might make changes that will affect Social Security benefits and/or Social Security taxes.


What can you do?

You can engage a professional in financial planning. They will help you understand the answers to a few key questions.


How dependent is your financial plan on Social Security?

Should you consider another form of guaranteed income, such as an annuity?

If Full Retirement Age is increased again, would you need to work longer?

How would higher payroll taxes affect your current financial situation?


We can think about these questions, but without a financial plan in place, it’s impossible to know what impacts they may have on our lives. If you’re looking for help with this type of question, I know a guy.


As always, keep in mind that you don't have to go it alone. I’m Austin Preece, a financial planner in Eau Claire, Wisconsin, and I work virtually with people across the US. Check out my website to see what it's like to work with me and reach out if you have any questions.

If you found this post helpful, help spread the word! Share with friends and family that you think may benefit as well. But remember, this is solely for educational purposes - it's not advice.

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