Fixing Social Security: Part One

Tina Haapala |

By Gary Silverman, CFP®

The Social Security system is big. It is the single largest program in the federal government’s budget. Almost one-quarter of all federal dollars spent is done so through the Social Security Administration. It is also the primary provider of income to the majority of our nation’s retired folks.

Unfortunately, Social Security’s ability to pay out its promised benefits will end around 2033 or so when it runs out of reserves. At that time the amount of tax revenue coming in will be able to cover less than 80% of estimated benefits. That’s what they mean when it’s said that Social Security is going bankrupt. It won’t run out of money because with each American paycheck, it gets more. It’s just not getting enough.

This problem is not new. Every single person in Congress has known this for many decades. We knew that the baby-boom generation would retire. We knew they would live longer than previous generations. We knew that benefits paid would exceed revenue collected.

First, a primer. Social Security is not a retirement account that the government has set aside for you. It is a benefits program. The taxes you pay into it any particular year are not saved up for you. It is used to pay people who are then currently receiving benefits. In the early years, the system took in more than it paid out. Since 2010 that’s not the case. Currently, Social Security is paying out more than it is taking in, which is depleting the reserves that had built up.

Social Security is a promise made by the government to you. It is, however, a revocable and modifiable promise. It used to be that Social Security retirement benefits were not taxable. Now for many Americans, they are. It used to be that you could draw full benefits at age 65. No longer. So maybe the term promise is not a good one.

There are several ways to fix the gap. These include raising the rate that employees and employers pay into the system (raise taxes), raise or remove the cap on wages taxed (raise taxes on higher income earners), reduce the benefits recipients receive (lower benefits), increase the retirement age (another way to lower benefits), change the cost of living adjustments (still another way to lower benefits), or do means-testing (lowering or removing benefits if you make too much money otherwise).

The reality is that we’ll need to use a combination of solutions to fix the problem. What’s nice is that none of these solutions are complicated. What’s not nice is that almost every solution is a political landmine for some if not a majority of our politicians who are the ones who need to agree on any legislation to fix the system.

When I first started writing about this 20 year ago the fixes would have been fairly easy for most to absorb. But now things are getting a bit worrisome. Next time we’ll look deeper into some of the proposed changes.

Gary Silverman, CFP® is the founder of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm and author of Real World Investing