By Boyce F. Lowery, CLU®, ChFC®
The problems with Social Security sounds like the punchline to a bad joke. But unfortunately, like many jokes, the problems with Social Security are rooted in reality. It’s true that the program’s trust funds have been producing a surplus since 1982. But those surpluses officially ran out this year, forcing the system to start drawing down its reserve assets. (1) Recent estimates suggest that the current program will run out of funding by 2034, (2) at which point, if no changes are made, benefit payments may shrink to 78% of what Americans expect. (3)
The good news is, 2034 is still over 10 years away, giving lawmakers time to make some much-needed changes to the current system. The Sacred Trust Bill is one such change that is already underway. Introduced by Representative John Larson, the goal of this bill is to provide “measures that would boost benefits, and provide better protection from inflation,” and strengthen the overall sustainability of the trust fund. (4)
As we track the progress of this bill, it’s important to understand the current state of the system and how these proposed changes can help.
The Problems with Social Security
Here is a brief overview of the biggest issues with the current Social Security program.
Low Interest Rates
Just as workers can invest in employer-sponsored retirement plans and IRAs that earn money through investments, the Social Security Trust Fund operates the same way. The higher the interest rates, the more money the fund earns. Unfortunately, interest rates have been persistently low in recent years, even before the COVID-19 pandemic. (5) Because of this, the program as a whole is earning less money and becoming less sustainable. As we saw this year, administrators had to start dipping into the core assets of the fund in order to pay out benefits because the interest earned is not enough to cover current obligations.
The average life expectancy of Americans has been steadily increasing with the advent of modern medicine and technology. With that increase in lifespan comes an increase in the length of retirement, a factor that was not considered when the Social Security program was first implemented in 1935. The longer the retirement, the more total benefits are paid and the less money is left in the fund to earn interest, exacerbating the low interest rate issue and further decreasing the viability of the whole program.
Too Many Beneficiaries & Not Enough Workers
These issues are two sides of the same coin. The baby boom of the 1950s has resulted in an exponential increase in the number of people collecting (or expecting to collect) Social Security benefits in the coming years. Conversely, the drop-off in birth rates has resulted in not enough workers taking the place of those who have retired. The system is designed to operate at a ratio of 2.8 workers per beneficiary, (6) but recent reports show that we are now at 2.1 workers per beneficiary. (7) Though a .7 difference doesn’t seem like that much, when multiplied by the 69.8 million people relying on Social Security, (8) it indicates that the program is massively underfunded.
So, the situation seems pretty bleak. But there is hope on the horizon! The Sacred Trust Bill is scheduled to be discussed sometime this November. We’ve put together an overview of the bill’s biggest proposed changes (for a full outline of the bill click here):
- Benefit increase for all: This would consist of a 2% increase for all beneficiaries, which equates to roughly $30 per month on average.
- Changes the index for benefits to the CPI-E: The CPI-E measures how increases in the price of goods and services (inflation) specifically affects elderly people. This is different from the CPI-W index that is currently used to make cost-of-living adjustments. CPI-E is projected to be higher than the CPI-W, which will allow for benefits to better keep up with inflation over time.
- Increases the “special minimum benefit”: The new minimum benefit is meant to prevent poverty for low-wage earners who have paid into Social Security, but traditionally have not been able to live solely off of their benefits in retirement.
- Raises the income thresholds for Social Security taxation: The new thresholds would be $35,000 for individuals and $50,000 for couples. This is up from the current thresholds of $25,000 for individuals and $32,000 for couples.
- Increases benefits for long-term recipients: This change is meant to reduce poverty among the oldest Social Security beneficiaries by increasing the monthly benefit amount after the 16th year of payments.
- Increases the Social Security benefit formula and would extend the payroll tax to earnings over $400,000: Currently, the payroll tax is capped at $142,800 in earnings, which limits the amount that high-income individuals can both pay into the system and receive back as benefits. This change would affect the top 0.4% of wage earners.
These proposals are subject to change as the bill moves through Congress. At this point, the legislation is not expected to pass until at least 2022. No matter what happens, we’ll keep you up to date and informed as the situation unfolds.
We’re Here to Help
If you are nearing retirement, or have concerns about how Social Security will impact you, reach out to us today. At Suncrest Advisors, we will monitor the ongoing discussions around Social Security and work with you to make any necessary adjustments to your retirement plan. Call us at 888-827-0146 to review your plan today.
Boyce Lowery is a 40-year veteran and established expert in the insurance industry. As the managing partner of Suncrest Advisors, he, his partner, and their associates all aim to provide financial security and peace of mind to business owners, executives and professionals, and high net-worth individuals across the United States. Along with more than four decades of experience, Boyce is a Chartered Life Underwriter® (the premier designation for insurance professionals signifying specialized knowledge in life insurance and estate planning) and a Chartered Financial Consultant® (known as the advanced financial planning designation). To learn more, visit https://suncrestadvisors.com/ or connect with Boyce on LinkedIn.