The State of Social Security
Sixty-two percent of retirees report that Social Security is a major source of retirement income. By contrast, only 35% of workers expect the program to be a major source of income for them in retirement.1
Social Security was never intended to be a retiree’s sole source of retirement income, so lower expectations are realistic and could inspire you to save more in your retirement accounts. But low expectations also reflect concern about the future of the program. Only 10% of workers are “very confident” that Social Security will continue to provide benefits equal to those provided to current retirees.2
There are good reasons for concern, but Social Security is not in danger of collapsing entirely. Here are some key facts to consider.
Social Security retirement and disability benefits are funded by payroll taxes paid by current workers and their employers. As the U.S. population has aged, the number of workers per beneficiary has dropped (see chart). Payroll taxes from current workers are no longer sufficient to pay benefits to current retirees and other beneficiaries.
Social Security taxes and payments are processed through two trust funds, one for the Old-Age and Survivors Insurance (OASI) program and the other for the Disability Insurance (DI) program. When there were more workers per beneficiary, these funds built up reserves; more recently, the reserves have been used to make up the shortfall between payroll taxes and benefits. According to the 2016 Trustees Report, the OASI trust fund reserve will be depleted in 2035, at which point the program will be able to pay only 77% of scheduled benefits. (The DI trust fund reserve will run out earlier, in 2023, after which the program will be able to pay 89% of scheduled benefits.)3
Many ideas have been suggested to address Social Security’s fiscal challenges. Here are some commonly cited solutions, with estimates of their impact from the Chief Actuary of the Social Security Administration.4
Eliminate or increase the earnings cap. Workers pay Social Security taxes on income up to an inflation-adjusted cap ($127,200 in 2017). Eliminating the cap in 2017 and later years would address 89% of the Social Security shortfall if benefits were not increased for high earners (72% if benefits were increased). Increasing rather than eliminating the cap would have a significant but smaller effect.
Increase the payroll tax. Workers currently pay 6.2% of earnings (up to the earnings cap) into the Social Security system, with employers matching that amount. Increasing the payroll tax to 7.6% for both workers and employers in 2017 and later years would completely eliminate the shortfall.
Raise the full retirement age. The current age to claim full Social Security retirement benefits is 66 for individuals born between 1943 and 1954; full retirement age increases gradually to 67 for those born in 1960 and later. Raising the full retirement age to 69 by 2034, with small increases thereafter, would eliminate 40% of the funding shortfall.
Other suggestions include reducing benefits for high earners, using a more conservative measure of inflation for benefit increases, and raising the minimum eligibility age (currently 62).
Congress has been slow to take action, but the clock is ticking. It’s likely that any changes would apply primarily to future beneficiaries rather than to those who are eligible for Social Security at the time any changes are adopted.