We hear a lot about the doubts over the future of Social Security. Here are a few I've come across:
- “Three-fourths of those 18 to 34 don't expect to get a Social Security check when they retire.” — USA Today
- “My husband and I are both 28, and we laugh every time we hear [‘yes, you'll receive Social Security']. No, we won't receive Social Security, even though we've both been paying into it since we were teenagers…I can't think of one of my peers who expects Social Security to still be around when we're retirement age. Call us bitter.” — A comment to my last column (“When Will You Be Able to Retire?”)
- “Six in 10 Americans who have not yet retired believe they will get no Social Security benefits when they retire, more pessimistic than at any time since Gallup began asking this question in 1989.” — Gallup
- “According to one survey, 100% of people married to Robert Brokamp wish he would shave his head rather than try to pull off a comb-over.” — My wife
If you're among the doubters (of Social Security, not my hairdo), then listen up: The following paragraph is the most important group of words you'll ever hear regarding Social Security. It's key to understanding how the program works, and whether you'll get anything. Here it is:
Social Security is predominantly a pay-as-you-go program. Most of the payroll taxes that are collected from today's workers go into the checks of today's beneficiaries. Thus, as long as there are people working and paying payroll taxes, there will be money to pay Social Security benefits.
According to the most recent Social Security Trustees report, from 2037 to 2084 payroll taxes will be enough to cover 75% of projected benefits. That's not great, but that's not nothing, either.
People who think that they won't receive any Social Security benefits must believe one or all of the following three things:
- In the future, people won't work.
- In the future, the government won't collect payroll — a.k.a. FICA (Federal Insurance Contribution Act) — taxes. Currently, workers “contribute” 6.2% of their paychecks to the Social Security system, and their employers match with another 6.2%; the self-employed pay the whole 12.4%. Another 2.9% goes toward Medicare. As you know if you've looked at your paycheck, it's a separate withholding from income taxes. In fact, the majority of Americans pay more in FICA taxes than they do in income taxes.
- In the future, Social Security will be means-tested to such a degree that the “wealthy” (an arbitrary designation, to be sure) won't receive any benefits. Those who don't think they'll receive Social Security assume they'll be among these “wealthy.”
I don't think Nos. 1 and 2 are likely. No. 3 is possible. The program is already means-tested to a degree, since the percentage of income that is replaced by Social Security decreases as lifetime earnings increase. However, I think that if changes to the means-testing formula result in a group losing their benefits completely, it will be a small group — certainly not 60% to 75%, as the aforementioned surveys suggest. I find it very unlikely that a future Congress — elected by future citizens — will change the program in a way that the majority of people who pay FICA taxes won't get at least some benefits.
Those Crazy Trust Funds
For many years, the payroll taxes collected were more than needed to pay current benefits. The surplus went into the Social Security trust fund, which invested the money in special-issue U.S. Treasury bonds. However, this year — thanks to the stinky economy — benefits will exceed revenues. That's projected to temporarily reverse, but at some point in the middle of the next decade, the retirement of the baby boomers will cause benefits to exceed taxes. This is where the trust funds come in. They'll be sold to cover the shortfall.
In my opinion, this is the essence of questions about the future of Social Security: What, exactly, are we to make of these trust funds? Are they truly assets? Here are the two arguments:
- Those who think that the Social Security system is essentially sound will point out that of course the trust funds are real assets. They're full of U.S. Treasuries, which are considered the safest investments in the world.
- Those who think otherwise point out that since Treasuries are federal government debt, the trust funds contain just worthless pieces of paper with a note written on them that says, “Dear Uncle Sam: I owe you lots of money. Love, Uncle Sam.”
I have to admit, I haven't quite decided to which camp I belong. I'm inclined to go with the latter. After all, when, say, 2020 rolls around, and the Social Security Administration needs some money from the trust fund, it will take one of these special-issue Treasuries to Uncle Sam and want to exchange it for cash to be sent to retirees. Where will that cash come from? I almost think I need to see a spreadsheet or detailed flowchart or something to fully understand how all that will work. If you have suggestions for how to accurately think about the trust funds, I'm all ears.
For Now, Plan on Getting Less
That's enough talk about Social Security for now (assuming you're still reading). From a financial-planning perspective, I'll reiterate my advice from my last post. If you are in or near retirement, plan on getting your benefit. If you're younger, play it safe and plan on getting 25% to 75% of your projected benefit. But plan on getting something.
I'm sure you have your own thoughts and opinions about Social Security, and I encourage you to share them below. However, let me say this: Often, discussions following articles about Social Security turn into political brawls that degenerate into name-calling and general silliness. So please, all you right-wing nutjobs and left-wing commies, let's keep it civil. Stick to the topic of Social Security and the facts. And maybe advice for creating a sweet comb-over.