Once upon a time, Social Security was a new program whose creation gave struggling American families a lot of hope for their financial futures. When workers retired or got hurt on the job, they would have the protection of a steady monthly payment that would allow them to provide for their basic needs. Today, working Americans don’t have quite such a rosy view of Social Security – and some believe that the money will run out before they reach retirement age.
That’s not what’s happening, though. At least, not exactly. It’s true that the future of Social Security is shaky. But that uncertainty doesn’t mean that workers will be left holding the (empty) bag when it’s their time to retire.
Social Security: An Overview
Before a worker can understand Social Security’s future, it’s important to understand how the program is actually funded. Some people imagine a huge bank account somewhere that holds all of the funds for Social Security. When it runs out there will be nothing left, they fear. But that’s not how the program actually works.
How Social Security is Funded
As most Americans probably know, workers pay into Social Security with every paycheck. Americans are required to contribute 12.4% of their earnings through Medicare and Social Security taxes, called FICA (Federal Insurance Contributions Act) taxes.
If someone is paid by an employer, he should see 6.2% of his paycheck withheld for FICA taxes, with his employer contributing the other 6.2% through payroll taxes. If someone is self-employed, she should be paying the entire 12.4% herself. (Only income up to $128,400 is taxed this way, as of 2018. So if someone earns $148,400 per year, she won’t be taxed on that “extra” $20,000. This earnings cap rises over time as wages increase.)
Those taxes make up a big part of the Social Security fund. They pay for retirement benefits and disability benefits. They’re not the only source; high-earning retirees also pay taxes on their Social Security benefits, which are also added to the fund.
How Social Security is Paid Out
When today’s workers retire or become disabled and qualify to start receiving Social Security benefits, their monthly payments come out of that fund. Basically, if someone is still working and paying Social Security taxes, she’s helping to pay for the benefits that today’s retirees receive. And when it’s her turn to receive Social Security, the people who are working at that time will pay for her benefits.
Or will they? That’s the question that worries aging Americans.
The Future of Social Security
Here’s the problem. Baby Boomers are now retiring in huge numbers, and will continue to do so over the next decade. (The youngest Boomers were born in 1964, putting many of the members of this group in their 50s right now.) At the same time, the working population is actually getting smaller because the birth rate has slowed down in America.
What does that mean? More people are going to be getting money out of the Social Security fund, while fewer people put money in.
What the Projections Show
Current projections show that the Social Security fund will be depleted by 2034. Somewhat frighteningly, 2010 projections showed the fund would run out by 2037 – meaning that the “end date” is actually moving up as we get closer to it. That fact has a lot of people scared, and with good reason. But it doesn’t mean that workers will stop receiving benefits in 2034, or that they’ll go without Social Security benefits if they retire after that point. After all, even when the fund runs out there will still be millions and millions of Americans working and contributing to the fund.
When we reach that depletion point, there won’t be any extra money to cover the gap between the number of people contributing to Social Security and the number of people receiving benefits – and that means payments may have to be cut, in order to stretch that money. Projections show that taxes alone will be enough to cover about 76% of Social Security benefits. So there will still be money coming in, but reducing benefits by that much would be catastrophic for many retirees and disabled workers.
Current Solutions on the Table
Several options exist for preventing the projected shortfall.
- The retirement age could be raised, which would reduce the number of people who are receiving benefits at any given time and increase the number of people contributing to the Social Security fund.
- The income cap, currently set at $128,400, could be increased so that high-earning workers would have to contribute more to the fund.
- Benefits could be cut so the fund would have to pay less to retired and disabled workers.
The current administration is focusing on the last one. The House Budget Committee’s 2019 budget proposes a $4 billion cut to Social Security over the next 10 years, which would be accomplished by preventing people from receiving unemployment benefits and Social Security disability payments at the same time.
So here’s the bottom line: changes do have to be made at some point, although in a rocky political era it’s hard to say with any certainty what they’ll be and how long it will take to get both sides to agree on them. If an American is currently receiving disability payments, it is possible that he’ll see them trimmed in the next few years. But Social Security benefits aren’t disappearing, and the fund is still able to pay out benefits for now.
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