4 Reasons Not to Panic About Social Security's Future
Yet amid the gloomy outlook, there are still reasons for Americans to be hopeful that Social Security's future isn't in jeopardy. Here are four:
1. Simple Fixes Can Extend Endangered Disability Benefits
One of the most alarming headlines from the Social Security Trustees Report was that the trust fund for disability benefits is expected to run out of money within two years. After 2016, payroll tax revenue will no longer be adequate to pay full disability benefits to those receiving them as well as those expected to get them in the future.
Yet given that the Social Security Old Age and Survivors Trust Fund has a much longer sustainable lifespan -- until 2034, according to the latest projections -- the simple fix that could extend full disability benefits is to allocate more payroll taxes toward the disability program. This will have the effect of extending the Disability Trust Fund's solvency at the expense of the trust fund that covers retiree and survivor benefits. But because the disability program is so much smaller, the net impact will be minimal, and the Social Security Trustees kept their combined estimate of 2033 for both trust funds unchanged from last year's levels.
2. Interest Income Is Still Enough to Cover Social Security's Shortfall
Many analysts focus on the coming demographic shift that will put immense pressure on Social Security. For now, though, the Social Security Trust Fund is working the way it was supposed to, and what many don't realize is that the fund's balance grew in the past year.
Specifically, the Old Age and Survivors Trust Fund brought in almost $744 billion in 2013, while paying about $680 billion in benefits. Payroll taxes and other sources of revenue from taxation and the government's general fund weren't enough to cover all of Social Security's liabilities to pay benefits, leaving the program with a gap of about $34 billion. But interest income of $98 billion on the balance in the trust fund was enough to more than bridge that gap. As a result, the trust fund for old age and survivor benefits has $2.67 trillion in assets -- $64 billion more than it had at the end of 2012.
3. This Year's Projections Used More Conservative Assumptions
One thing the trustees have to predict is how fast wages will grow. One complaint in past reports was that the trustees assumed that wages would grow at an average rate of 1.5 percent after adjusting for inflation. That hasn't happened in the latest recovery, as wage growth has been closer to 1 percent.
To reflect that going forward, the trustees reduced their projections for real wage growth to 1.1 percent going forward. That has an immediate impact on payroll tax revenue, but it will also result in the long run in lower benefits for current workers when they retire, lessening the future strain on Social Security if the trend continues.
4. The Worst-Case Scenario Isn't as Bad As Many Fear
There's a common misimpression that when the Social Security Trust Funds run out of money, benefits will stop entirely. But even when trust fund balances reach zero, Social Security will continue to function based on the revenue it takes in through the payroll taxes that workers have withheld from their paychecks and that employers are required to match.
Even after 2033, the Social Security trustees estimate that payroll tax revenue will be sufficient to pay more than three-quarters of current benefit levels, even if lawmakers take no action to remedy the situation. Moreover, even small tweaks could boost that amount, leaving Social Security recipients relatively unscathed.
Social Security does face some serious challenges, and few people dispute that lawmakers should take action to shore up its financial condition sooner rather than later. But it's important not to exaggerate the potential effects of Social Security's woes on the American public. Knowing the actual impact on your finances in any contingency is important to help you plan better.
Dan Caplinger is a Motley Fool contributing writer. For more on ensuring a comfortable retirement for you and your family, see our new free report in which Motley Fool retirement experts give their insight on a simple strategy to take advantage of a little-known IRS rule to boost your retirement income.