Is Social Security Going Bust?

In Planning for Retirement, One Topic is Often Top of Mind: What if Social Security Goes Bust?

WRITTEN BY SAX WEALTH ADVISORS

But then there are those headlines, warning us that the Social Security trust fund is set to run dry around 2034. Does this mean you should grab what you can, as soon as you’re able? Let’s explain why we agree with Social Security specialist Mary Beth Franklin, who suggests the following:

But let’s unpack this statement. First, “depleted” does not mean the Social Security Administration is going to turn out the lights and go home. It means it could run out of trust fund reserves by then, which are used to top off the total amount spent on Social Security benefits. There are still payroll taxes and other sources to cover more than 77% of the program’s payouts. So, worst case, if we did nothing but wait for the reserves to run out, we’d be forced to make hard choices about an approximate 23% shortfall starting around 2034.

Why We Believe Social Security Will Change

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

Why We Believe Social Security Will Endure

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:

Admittedly, Social Security is between a rock and a hard spot. Nobody wants to lose benefits they’ve been counting on, or spend significantly more to maintain the status quo. But if we don’t do something to shore up the program’s reserves, our options will likely only worsen.

“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.”

“Social Security is not sustainable over the long term at current benefit and tax rates … [and] trust fund reserves will be depleted by 2034.”

As members of Congress wrangle over the “best” (and least abhorrent) solutions for their constituents, they have been submitting proposals behind the scenes, and the Social Security Administration has been weighing in on the estimated effect for each.

Time will tell which proposals become legislated action, but the range of possibilities essentially fall into two broad categories: We can pay more in, or we can take less out. Most likely, we’ll need to do a bit of both.

Paying More In

To name a few ways to replenish Social Security’s reserves, Congress could:

Raise the cap on wages subject to Social Security tax: As of 2023, earnings beyond $160,200 per year are not subject to Social Security tax. There’s been talk of increasing this cap, eliminating it entirely, or reinstating it for income beyond certain high-water marks.

Increase the Social Security 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. (This does not include an additional Medicare tax, which is not subject to the 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 the tax on Social Security payouts, and direct those funds back into the program: Currently, if your “combined income” exceeds $44,000 on a