Will Social Security Run Out?

My sons may call the title of this article “clickbait” as most people want to know what will happen with Social Security.  Well, the title simply reflects a common question clients ask me on a regular basis.  I thought it was worth spending some time sharing a few facts and thoughts on the future of Social Security, especially with the release of a recent report.

Earlier this month the Social Security Trustees Report was released.  The headline was benefit payments will outpace revenue this year, causing Social Security to tap into its trust fund for the first time since 1982.  It also stated the trust would be empty by 2034, which is a year earlier than projected last year.  I did not see any such articles after the report was released, however, I am sure there were some calling for the end of times as a result of the trust being emptied in 16 years.  This is not one of those articles (I’m too optimistic for that).

If you are old enough you may remember the early 80s and how the then Social Security crisis was handled.  There was quite a bit of hand-wringing in the press about not only the collapse of the western world, but also how one “expert” predicted 44% of taxes would go to Social Security.  In 1981 (one year before Social Security was supposed to fall completely apart according to some predictions), President Reagan formed a joint bipartisan task force to work on Social Security.  Oh, and it was created in December of 1981, not the start of the year. 

The task force spent a bunch of time fighting, wasting time, and pretty much doing nothing the first year.  While the task force spun its wheels, Social Security borrowed money to make payments.  Ultimately, the task force provided some concrete recommendations to help stabilize Social Security going forward.  A compromise bill was reached and approved in 1983. 

Many of the lessons of the early 80s still hold true and I expect we will see it happen again, but not for some time.  Let’s dive into them.

• The reforms from 1983, and even an earlier 1977 “patch,” did not reduce the benefits for any current recipients.  Elected officials are funny that they like to be reelected and upsetting the most active block of voters (retirees) is a really good way to lose an election. 
• Taxes were raised and also the age for full benefits was increased, but it was focused on workers who were 45 or younger at the time.  This age change allowed them time to better prepare for retirement. 
• Some modified means-testing was done where high-income households received reduced planned benefits.

If you step back you may realize these changes were not too significant, however, they had a dramatic impact on the ability to stabilize Social Security for decades.  I expect a similar scenario coming into play, but not for some time.  Don’t be surprised if it is 2032 before Congress gets serious about working on shoring up Social Security at that time.  I mean, why work on something now when you can let it be a political issue for years to come?

At the end of the day, recommendations will be made, a compromise will be reached, and changes will be put into place that most likely impacts younger people.  However, if we reach 2034 without a solution know the government can borrow to pay out benefits. Also, even without borrowing 79% of benefits can still be paid through the current tax structure.  While you will hear from lots of experts/chicken littles, I am confident Social Security will not run out.