* December 2017 update: Some of the more recent SSA stats from this post can be found over here.*
Remember those push granny off the cliff ads? They were aired back in the 2012 presidential campaign and showed Paul Ryan literally pushing a grandma off a cliff. I guess it was in response to Ryan wanting to either cut or not expand Medicare. Whatever the case may be, it reminds me of the doom and gloom talking heads that say the government is going to take your Social Security or that Social Security will run out of money. This type of advertising / propaganda relies on the most primal of human emotions: fear.
This video is very graphic. It shows a granny being pushed off a cliff by a middle-aged man in a suit. No granny’s were hurt during the filming of this video. A stunt-granny did suffer a splinter during taping.
It’s amazing to me how easily people will believe almost whatever is told to them without proper fact-checking. Now sure, there are many rationalists, free-thinkers, and skeptical people who say, “show me the data or other evidence you have to back up your statement.” But I think many folks, maybe even a majority of folks, tend to believe what they wish to believe to be true. They seek the thoughts and ideas that confirm what they already believe. People suffer from all sorts of biases and ideologies. I’m not saying I’m above these either. Quite the opposite. Until I become part AI, I’ll continue to suffer from all sorts of human conditions.
The problem is that many people who are going to or are already receiving Social Security might believe something that isn’t true, especially when people are fearful. When the doomsayers make claims that the Social Security program will run out of money, they’re really just playing on people’s fear to try to push a certain outcome. Too often those same people that say Social Security is going to stop sending your check are either trying to sell you something, scam you, or are just downright whacky.
The rise of the internet has allowed all sorts of nut jobs tell you that Social Security will run out of money or is a scam. People seemed to be duped by visceral advertising / campaigning instead of relying on their intellect to make decisions. Look no further than internet ads. Notice at the bottom or to the side of articles, there are usually crazy pictures with headlines that end in, “You won’t believe what happens next…” or some such thing. Internet ads are mostly horrible, even ads on reputable websites seem to be super click-baity. That tells me something. It tells me that even intelligent people reading a reputable website can’t help but to click on some of those ads. Why else would the webmaster serve them?
The Straight Truth on Social Security
The fact is that Social Security will be around for a long time. You can find all the data you need to know on Social Security in the 2016 OASDI Trustees Report. The Social Security Trust (the SSA calls this the OASI Trust Fund*) had $2.8 trillion in assets by the end of 2015. This actually grew by $24 billion since the end of 2014. The Social Security Trust is actually forecast to increase to $2.9 trillion by 2020. This is due to the Social Security program bringing in more money than it pays out.
*There are actually two different funds that make up the Social Security Trust: the DI Fund and the OASI Fund. One is the disability insurance trust and the other is the old-age survivors insurance trust. They’re simply asset accounts that hold Treasuries and can be drawn down as needed.
After 2020, the Social Security Administration is forecast to pay out more than it brings in from an income standpoint. Not to worry just yet. The $2.9 trillion will come in handy at this point. We’ll be able to continue to drawdown reserves slowly, by about $100 billion a year until 2025. The reserves will still sit around $2.5 trillion in 2025. Social Security is in great shape over the next decade.
Social Security will be in much worse shape as we approach 2035. At this point, the Trustee Report forecasts that the OASI Fund will be drawn down to zero. We’ll have to decide as a nation (or at least half-witted barely-elected government officials will have to decide) what to do with Social Security at this point. See below for what the Trustee Report says will be needed at this point.
Does Social Security Spend More Than It Brings In?
In 2015, the Social Security program paid out $897 billion, while it brought in $920 billion. Social Security actually brings more in every year than it pays out! Social Security even makes money on Treasury securities. The program made $93 billion in interest income in 2015.
The Trustee Report forecasts that Social Security will start running an annual deficit in 2020. The cause is of course American demographics. Baby boomers are exiting the workforce and drawing Social Security at an increasing rate. Those born in the mid to late 1950’s are next up to start slamming Social Security. Young folks better work more so that they can pay more into payroll taxes (Social Security payroll tax caps out at a salary of $127,200 in 2017)!
When Will Social Security Run Out of Money?
Social Security (the OASI trust) is set to run out of money on 2035. What does this actually mean? Well, it simply means that the Social Security asset account will be drawn down to zero. It doesn’t mean that Social Security will stop paying out checks. Why? Because Social Security will still have an income. Social Security is in good shape for the next 18 years or so.
After that point one of two things will likely need to happen to Social Security prior to 2035:
1) The OASDI portion of payroll taxes will need to be increased by 2.6 %.
2) Social Security benefits will need to be cut by about 16% from today’s benefit standpoint.
Or, a combination of tax increases and benefit cuts will need to be adopted. These numbers are straight from the 2015 Trustee Report published in June of 2016. The next Trustee Report will be published in June of 2017.
Here are some key assumptions that the Social Security Trustees use to forecast these numbers:
You can see they take into consideration all sorts of variables, including immigration, birth rates, unemployment rates, etc. They put some real work behind the numbers.
What Else Can We Do To Save Social Security?
1) Increase earned income. A great way for the government to bring in more Social Security income is for people to earn more money. It’s a Win-Win, one of Stephen Covey’s 7 Habits. I stated earlier that the Social Security portion of payroll taxes caps out at $127,200 in 2017. Those who make more than this each year aren’t taxed at 6.2% for the amount above the cap. So the maximum payroll tax you’ll pay in 2017 is $7,886. Same goes for your employer. Someone who makes $50,000 annually isn’t even paying half of what they could be paying into the system. If people got raises, they’d pay more into the system and it would solve a lot of problems. Easier said than done here.
Some people might think here that if people make more money, they’ll take more out of the Social Security system. That’s correct. But higher-income earners don’t take as much out of Social Security on a relative basis. This is due to the bend-point formula. Low-income earners simply pull more out of the system than they pay in compared to higher-income earners.
2) Add more people to the workforce. Instead of pushing granny off a cliff, let’s put her back to work! Ok, maybe not granny. A strong economy where many people participate in the workforce will only help Social Security’s numbers. Right now 153 million people are employed in America and 7 million are considered unemployed. These are pretty good numbers all things considered. In order to get numbers as high as possible, we have to make sure we’re not impeding job growth. How we do that is a entirely different post.
The reverse side of the coin here is that if we experience another big recession, Social Security’s numbers will get much worse. The business cycle will eventually turn and we’ll have another recession. It will happen. The stock market will go down. People will be laid off. A sector of the economy could get decimated. The key is to have it be a shallow recession. We can’t handle another Great Recession.
What Can You Do To Maximize Your Social Security?
Age 50 +
Your Social Security isn’t going anywhere if you’re going to retire in the next 10 years. The key for you is to maximize the amount of Social Security you receive. You can calculate the approximate amount you’ll receive using one of these six online calculators. I give pros and cons of each calculator in this article. I would also consider using a software to calculate the amount of Social Security you’ll receive using various filing strategies. Filing mistakes can cost you tens of thousands of dollars. It makes sense to put the time in up front to make sure you make the right decision.
Ages 40 – 49
You’ll still likely receive a decent chunk of Social Security if you’re currently in your forties. Benefits may be cut by 16% by the time a 40 year old reaches 62, possibly as high as 20% from today’s benefit amount. You’ll have to save a little more in your private retirement accounts compared to your older friends. The good thing is you have this knowledge now that Social Security may not be as high for you. It won’t pay the same percentage of your living expenses as someone who is currently receiving Social Security. But it will still be there for you.
Ages 30 – 39
For those of us in our thirties, the benefit amount becomes much harder to forecast. No one really knows how the numbers will shake out because of the multitude of variables involved. One thing is for sure. You will still receive Social Security too. You paid into the system and you’ll get something out. It’s likely to be greatly reduced from today’s benefit amounts. The economy could surprise everyone and the amount actually could be higher than today’s benefit. You never know what’s going to happen.
I look at data when deciding the fate of Social Security. You should too. The next Trustees Report will come out in late June 2017 for the fiscal year 2016. It will show that there’s a Social Security surplus with a growing trust fund. It will also show more of the same forecasts that show that the program will be hit hard from 2025 through 2035. When will Social Security run out of money? I say it will never actually run out of money although we’ll have to make some changes in order to keep the program going after 2035. Good luck in maximizing your Social Security and please feel free to email me with any questions or comments.