No, Social Security Will Not Run Out

Dispelling the myth most Americans believe

One of the key assumptions we account for in our clients’ financial plans is Social Security. 96% of the American workforce pays into Social Security and virtually 100% are familiar with the topic. However, there has been much doubt as to the reliability of receiving these benefits in the future, after the Social Security Administration released their 2021 Trustee Report. This report states the “…Trust Fund asset reserves will become depleted and unable to pay scheduled benefits in full on a timely basis in 2034” if no changes are made.

The general public – 71% of which according to a recent Nationwide survey – believes Social Security will run out during their lifetime. By this poll, it is evident that many are misconstruing the words of the Trustees or are confused as to how the Social Security system works. There are a few key words in the quote I want to specifically address to show the likelihood of Social Security going to zero is implausible.

“Trust Fund asset reserves”

These are key words that cannot be overlooked. For over three decades, more money has been paid into Social Security via the 6.2% payroll tax than has been paid out in benefits and other expenses. Thus, there has been an accumulation of funds over the years. That surplus represents the “trust fund asset reserves” referred to in the report. The Treasury invests these reserves in interest-bearing Treasury securities. At the end of 2021, there was a total of $2.85 trillion in trust fund reserves. However, 2021 was the first year that the administration began tapping into those reserves to help pay benefits.

What this means: There is a significant difference between “Social Security is projected to run out in 2034” vs “the trust fund reserves are projected to run out in 2034”. Payroll taxes from current workers will continue to pay for the bulk of the benefits while the trust fund reserves will make up the difference (if necessary) between income and costs until depleted. Of the total $1.145T paid out in benefits in 2021, the reserves made up $70B (or less than 5%) of the total.

“In Full”

These two words indicate that there would still be a benefit paid to workers beyond 2034, but it would be reduced. In the most recent projections, the trustees estimate payroll tax revenues being able to pay 77% of benefits in 2034 if no changes are made.

What this means: The benefit would not disappear starting in 2034. The Social Security Administration would still be able to fund a majority of the projected benefits due to the payroll tax income received every year.

“If no changes are made”

The last point to remember is this discussion assumes no changes are made to the current structure of Social Security. It is very unlikely that our policymakers would fail to act in some capacity on a vital income source for most American retirees.

What this means: It does not take a major overhaul to prolong Social Security benefits by many years. A slight change (or combination thereof) could have a profound impact and the sooner a change is implemented, the more gradual the changes can be over time. The administration even includes a link to several of the most likely changes here. Some of these include raising the full retirement age, eliminating the cost-of-living adjustment, or increasing the maximum taxable wage limit (currently $147,000 in 2022).

Given the above, we believe Social Security benefits WILL be around for longer than what many pundits think today. Changes will need to be made to sustain the program for generations to come, but these changes need not be drastic. It is important to keep in mind that when President Roosevelt established Social Security in 1935, it was never designed to fully replace your income needs in retirement. That is why it is crucial to save for your retirement outside of what you pay into Social Security and grow your own portfolio over time – using Social Security as a supplement. Reach out to THOR if you want to discuss how we can help ensure your financial plan is on the right track.