Gateway Financial Partners

Social Security Part 3 – Insolvency

In the first two parts of this 3-part blog, we discussed how much money you could get from Social Security based on your work history and family situation.  But what if the Social Security trust fund isn’t there to pay your full benefits?  In this blog, we discuss what happens when Social Security goes insolvent (or, to continue my metaphor from the previous parts, what happens when the royal family has no clothes?).

To answer this question, we need to start with an understanding of how Social Security benefits are funded.  First, the government collects payroll taxes from current workers and second, there is the balance in the Social Security trust fund (two trust funds actually: the OASI fund for retirement benefits and the DI fund for disability benefits).  There is a balance in the trust fund from years when the government collected more in Social Security taxes than they paid out in benefits.  Unfortunately, that is not the case presently.  The benefits being paid out are outpacing the taxes being collected which is depleting the trust funds over time.  At the current trajectory, it is projected that the trust funds could run out as soon as 2033.

It is important to note that we have been in this situation before.  From 1973 to 1983, Social Security was operating with negative cashflow just like we are seeing now which was depleting the balance in the trust funds.  However, instead of letting the trust funds run out, Congress passed changes to Social Security benefits which included increasing the Normal Retirement Age (NRA) from 65 to 67 and the introduction of taxation of Social Security benefits based on income level.  So, one option for lawmakers would be to pass further legislation sometime before 2033 which would further increase the NRA, increase Social Security taxes or decrease benefits in some other way.  However, it does not appear that either party is ready to do this anytime soon.  So, what happens if the trust fund does run out this time?

At the point that the Social Security trust fund balance runs out, most people that I talk to seem to believe that Social Security benefits would just stop.  This is not expected to be the case.  There would still be the payroll taxes coming from current workers, and these taxes would cover something in the range of 70-80% of current benefits, depending on which projections you believe.  Currently, the government does not have the ability to borrow to cover the difference.  So, there is a real risk of a haircut to benefits, but this does not mean the elimination of benefits. 

As a result, I believe that Social Security will be in existence in some form for my clients and as such I do include the benefits in their retirement projections today.  But I also guide my clients to have their own savings and income streams just in case Social Security isn’t what they expect it to be.  Prince Harry can be a bit unpredictable, after all.

The tax and retirement planning information contained herein is general in nature and should not be considered legal or tax advice.

This information is provided for general educational purposes only and you should bear in mind that laws of a particular state and your particular situation may affect this information. You should consult your attorney or tax advisor regarding your specific legal or tax situation.

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About the Author

Neil Manning, CFP®, AIF®

LPL Financial Advisor
I am a reformed actuary turned financial advisor, helping my clients with everything from investments to retirement projections to LTC insurance since 2014.  Unlike most normal people, I love numbers and finance – I’m currently reading a book about game theory which my wife and two teenage daughters think is unbelievably boring (they are wrong).  For more details about my background, check out my website below.
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