I am sure you have all heard that the social security system, many have come to depend upon, is inevitably going fail within our lifetime. After hearing this one too many times, I asked myself the following questions. Is this true? Can it be saved? Can I get my money back? I did a little digging and I came up with some answers.
First, not many of us know how the Social Security system works. Social security is really a few programs rolled into one. In the United States, Social Security is the commonly used term for the federal Old-Age, Survivors, and Disability Insurance (OASDI) program and is administered by the Social Security Administration. For this article, I will focus only on federal Old-Age and Survivors (OASI) program. I believe that this is the program about which most of us think when we hear “social security.”
The OASI program is funded in two ways. The first funding source is by a payroll tax that is paid by both an employer and employee via the Federal Insurance Contributions Act tax (FICA). The employee and employer each pay an equal share of 6.2% of the employee’s wages — or a total of 12.4%. This money eventually makes its way into a “trust fund” and then it is disbursed to current recipients of the program. The second funding source is through interest earned on “special issue” bonds backed up by any surpluses in the trust fund. This investment on behalf of the fund is by design. It is actually unlawful for this fund to sit solely as cash and the money is invested in bonds daily!
Since social security’s inception, in 1935, there has been many more working people paying into the system than recipients. This caused the trust fund to grow in leaps and bounds by both funding sources! For example, in 1945 there were 41.9 workers for each social security recipient. By 1975, however, there were only 3.2 workers for each recipient. After some changes to benefits, the ratio of workers to recipients hovered between 3.2 to 3.4 workers for each recipient.
Let us take a moment to learn why this ratio is important and why the ratio has been declining since the beginning of social security. The ratio of workers to recipients is important because, to a large extent, current recipients are being paid by current workers. So, to give an example, let’s say that a social security recipient is receiving $18,000 per year and — the average retired recipient receives about $17,650 according the Social Security Administration. According to the Social Security Administration the mean wage per worker is about $50,000; so, let’s say there are three workers (I use the number 3 to represent a 3 to 1 ratio of workers to recipients) who each earn $50,000. Since a total of 12.4% of each of their incomes becomes revenue for the social security trust fund, we have a total of 3 x $50,000 of income times 12.4% (FICA) the result is $18,600. Hence, these 3 workers can easily support the one recipient — with about a $600 surplus! This $600 surplus is then loaned out in the form of “special-issue” bonds. This example represents an oversimplification as to how the system works; however, the basics are all there. Keep in mind that that $600 surplus is, in a sense, multiplied by millions of workers over many years and the money in the trust fund (surplus) earns interest daily — the annual yield on this money is about 2.8%. According to the Social Security Administration’s 2019 Trustees’ Report, we currently have about $2.9 Trillion in the trust fund. The estimated interest earned on these funds is estimated to be more than $81 billion this year (2020). This is enough earned interest to pay out benefits to about 4.5 million beneficiaries!
Now, we can answer the question as to why the worker to recipient ratio is important. If you understand how the system works, obviously there is a point to which the ratio can drop where the current workers FICA contributions plus the interest earned on the bonds issued on behalf of the trust fund will no longer be able pay the benefits for the recipients unless we tap into the trust fund. That ratio, according to actuaries at the SSA, is near 2.8 workers for each recipient. In other words, once we drop below a 2.8 worker to recipient ratio, we will need to tap into the trust fund to pay the entitled benefits to retirees. As of the 2019 SSA Trustees’ report, we are at this critical number. The report, however, stated that we expect to dip below the break-even ratio in 2021. When this happens, the total annual income to the fund (through FICA and interest) will be less than the paid benefits — we will have to tap into the trust fund to “make ends meet.” Also, according to the report, the estimated year that the trust fund would be completely depleted is 2035. This does not mean that the system would fail in 2035. It only means that if we do not change anything, the deficiency would need to be paid from our annual budget. The system could still last for quite a few years after that!
Blame the boomers. Yes, I said it, blame the boomers! Actually, I blame this on the boomers’ parents — I mean, they didn’t ask to be born. So, why is the worker to recipient ratio declining? There are three main reasons. First, the boomers — the biggest generation in the United States to date — started retiring. Since 2008 we have had more people enter retirement (as a percent of the US population) than ever before. This is the biggest factor that is causing stress on the system. The second factor is that people are just living longer. Make no mistake though; the fact that people are living longer does not put anywhere near the strain on the system as the quantity of people (boomers) entering retirement. Over the years, SSA actuaries have planned for this longer lifespan of we (mere) humans. The third factor is that since the 1980s, our legislators have not prioritized the social security programs as important enough to do anything to sure-up the system. There are some easy and simple fixes that can sure-up the system ad infinitum — with little sacrifice. It seems that WE (the voting public) are not forcing our legislators to fix it! I guess we’re back to blaming the boomers as most of our legislators and most of the voting public are part of the boomer generation!
So, is the social security OASI program doomed? The answer is not necessarily! We must start voting for people who care that we don’t end up on the streets when we get old. We must start voting for people who have ideas as to how to fix the system so that it will last for years to come!
Yes, social security can be saved. There are many ways to save the system. I will list a few here; however, we would probably need a combination of some of these things to save the system. The first idea is to cut the benefits for all future recipients. While this might help to save the system, it comes with the most cost and it might ruin the whole idea of social security — making sure the elderly in our country have enough income to put food on their tables. I would not support this solution over other solutions!
The next idea, that I also do not like, is to means test the benefit. In other words, for those that have an income over a certain amount while in retirement, would get less of a benefit than those that have an income under that amount. There are many reasons why this is a troublesome solution. For example, if a retiree saved a million dollars, s/he would have incentive to hide that fact to get more of an entitled benefit from social security.
Next, we can increase the full retirement age (FRA). The FRA is the age at which one can receive the full amount of social security. This fix has already been done a few times. The current FRA is 67 (for those born after 1960). If we change the FRA to age 69 or 70 (maybe for those born after 1980-ish), the system would certainly last longer and it would delay the trust fund from being depleted by 2035. This could become part of a fix for the OASI system. I am cautiously in favor of this as part of an overall solution.
Another part of a solution would be to allow more immigrants into the country. The reason for this is that most people who immigrate to the United States and become employed do not work long enough in the system to collect a benefit or they receive e very reduced benefit. To receive any benefit from OASI, one must work for at least 40 quarters (10 years). However (to make a long story short), the calculation of benefits includes the average of the highest wages for 35 years. It is not likely that an immigrant could ever collect more than s/he contributes into the system. In other words, allowing more working immigrants into the country would increase the worker to recipient ratio.
Lastly, we can increase the FICA rate. As stated previously, the total contribution through FICA is 12.4%. I estimate that, if we act soon, we can sure up social security with anywhere between a 3.1% increase to a 4.0% increase (without any other fixes) split evenly between employer and employee. However, the costs go up the longer we wait. If we wait 7 years, I estimate we would need about 6% to 7% total increase (split evenly between employer and employee).
Can I get my years of FICA contributions back? The answer is simply NO! The money in the trust fund are not owned by you, me (I wish), or any individual. Although, if you work and contribute for at least 40 quarters you will be entitled to a benefit when you reach retirement age (62+). This entitlement does have conditions placed upon it; but most of us will receive the money. There has been some SCOTUS case law which concluded that under certain (exceedingly rare) circumstances the entitlement can be revoked. Please see Fleming v. Nestor, 1960.
My questions to my readers are:
- Do you think social security is worth saving?
- Of the solutions I listed above, which one(s) would you be in favor of enacting?
- Can you think of any other solutions to save social security?
- If you do not think that social security is a worthwhile program, why isn’t it?
- Would you like for me to write an article about how your social security benefit is calculated?
- About what other topics would you like for me to write?
