How Safe Is Social Security?

By Matthew Frankel Markets Fool.com

If you watch or read the news on a regular basis, chances are you've seen a headline or two to the effect of "Social Security is going broke." If you're a retiree collecting a Social Security check, or if you're a worker hoping Social Security will still be around when you get older, then the question of "how safe is Social Security?" is an important one. Here's the reality of Social Security's finances, what we can do to solve the problem, and what to expect from the new Republican government.

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The current financial state of Social Security

First, the good news: Social Security is not broke.Social Security had more than $2.8 billion in reserves in its trust fund at the end of 2015, and it was expected to run a small surplus in 2016. In fact, Social Security's income from payroll taxes, taxes on certain Social Security benefits, and earnings on its invested reserves are expected to exceed the program's expenses through 2019.

17 years until it's "broke"

The bad news is what happens in 2020, when deficits are expected to begin, and continuously grow, for the foreseeable future. Simply put, there won't be enough workers paying Social Security taxes to cover benefits for all the retirees drawing money from the program.

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If nothing is done, the Social Security trust fund is expected to be completely depleted by 2034. Once the reserves run out, it is estimated that the incoming payroll tax revenue will only be enough to cover about three-quarters of promised benefits, which would trigger across-the-board cuts.

To be perfectly clear, if Social Security runs out of cash, then monthly benefit checks will not simply stop arriving. As a worst-case scenario, Social Security benefits will have to be cut by about 25%. This would certainly be bad, but it's important to note that Social Security won't cease to exist just because it doesn't have cash reserves.

What can we do to fix it?

There are far too many potential changes to Social Security to discuss each one individually, but for the most part, they can be grouped into two main categories: benefit cuts and tax increases. Benefit cuts include proposals like raising the retirement age, reducing benefits for the rich, and across-the-board cuts, just to name a few. On the other hand, the payroll tax could be raised for employers, employees, the wealthy, or all of the above.

Although Republicans in Congress tend to favor cutting benefits, which I'll discuss more in the next section, the American public (including those who identify as Republican) are overwhelmingly opposed to any form of benefit cuts. The vast majority of people in all age groups, income brackets, and political affiliations say that Social Security is worth preserving in its current form, even if it means increasing taxes.

According to one survey by the National Academy of Social Insurance, the most popular solution would actually be a combination of gradually increasing the Social Security tax rate from 6.2% to 7.2% for both employers and employees, and removing the cap on Social Security taxable wages altogether. Not only would these changes fix the funding shortfall for the foreseeable future, but they would allow the Social Security Administration to increase its cost-of-living adjustments and raise the minimum benefit so that no retired worker would have to live in poverty, even if Social Security were their only source of income.

What President-elect Donald Trump and Republican leaders say about it

President-elect Donald Trump only mentioned Social Security a few times during his campaign. Basically, he pledged to leave it alone, saying the U.S. would honor its obligation to seniors -- no benefit cuts, no tax increases. Trump's plan is to create enough economic growth that more payroll taxes will begin to flow into Social Security, and no changes will be necessary.

Republicans in Congress have other plans. About a month ago, Rep. Sam Johnson (R-Texas), chairman of the House Ways and Means Committee's Subcommittee on Social Security, released a plan to reform Social Security that consists of massive cuts for most beneficiaries.

In a nutshell, Johnson's plan would cut Social Security benefits for all but the lowest earners. It would gradually raise the full retirement age from 67 to 69 and reduce cost-of-living adjustments, or eliminate them entirely for high-income retirees.

The net effect of the plan, according to the Social Security Administration's chief actuary, would be that a 65-year-old claiming benefits in 2030 would receive about 17% less than currently promised. A 65-year-old in 2050 would see a 28% cut. On a positive note, the plan would raise benefits for the lowest-income workers and eliminate income taxes on Social Security benefits.

So how safe is Social Security?

If history is any indication, something will be done to fix Social Security. For example, the last time there was a big shortfall, Congress raised the full retirement age from 65 to 67, a change that is still being phased in. The American public seems to feel that this was enough of a benefit cut and that it's time to increase Social Security's funding to preserve benefits.

Personally, I'd be surprised if a tax increase or any other type of major Social Security reform passed within the next couple of years. The president-elect and Congress simply have too many other big items on their agenda that are likely to meet less resistance.

When push comes to shove, your taxes may be increased, and it's entirely possible the full retirement age will be raised further. However, it seems more likely that Congress will hike our payroll taxes, preserving Social Security benefits for current and future retirees.

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