26 Unsettling Truths About Social Security
The Social Security program is turning 80 this year, and though most Americans won't commemorate this milestone, 57 million will benefit from it for more than $1,200 a month.
The future of the Social Security program has been much debated, especially this month, as a new Congress looks to approve or deny a budget that would decide the immediate future of disability payments. We can expect full saturation of headlines, a fair amount of politicking and, ultimately, a sneak peek into what this program will look like in the coming decades.
It could be drastically different. Social Security was created in the wake of one financial crisis; nearly a century later, as the country limps to recovery from another, policymakers are making decisions about the program's future that have real-dollar effects on just about everyone.
That makes it a scary time for the millions of Americans approaching retirement -- and the millions who are just starting to fund the Social Security system. We've put together a list of everything you need to know -- the good, the bad, the awful, the silver lining -- so you can start building a realistic retirement plan.
1. At Its Current Pace, Social Security Will Run Out by 2033
Since it was established in 1935, Social Security has been a "pay as you go" system -- essentially, a higher-stakes version of the take-a-penny-leave-a-penny tray. So the checks that retirees and other Social Security beneficiaries get are primarily funded by taxes taken from the paychecks of about 96 percent of workers (and matched by their employers), according to The Washington Post.
For the most part up until 2010, Social Security took in more from taxes than it paid out in benefits, investing the surplus in Treasury securities to earn some interest. That practice put about $2.8 trillion in Social Security trust funds.
Unfortunately, those funds are no longer just an emergency buffer. For the last five years, there's been a cash flow deficit -- it's currently about $75 billion a year, a number that's expected to rise precipitously by the end of this decade. At this rate, the 2014 Social Security Trustees report estimates that the trust funds will become insolvent, i.e. run out, by 2033.
2. Social Security's Disability Program Will Run Out Much Sooner
The Social Security program is financed by two trust funds -- one for retirement benefits, the other for disability benefits. The latter is slated to run out by 2016, at which point disability benefits will have to be cut by 19 percent, according to The Wall Street Journal.
President Obama's most recent budget proposed a 0.9 percent reallocation of funds from the retirement fund to the disability fund to prevent this from happening -- a "robbing Paul to pay Peter" method that Social Security has done 11 times since 1994. Even if this budget passes a Republican-controlled Congress, however, it would only be a temporary fix -- a fix that would shorten the retirement trust fund's runway by another, valuable year.
3. People Rely On Social Security Than Ever
Baby boomers, many of whom are leaving the workforce now or soon, are chronically unprepared for retirement. Not even half of all boomer households between 55 and 64 have any retirement savings, according to The New York Times, and the recent financial crisis wreaked havoc on the accounts of those who did plan ahead.
Even before the recession, our retirement savings habits were lacking. Defined-benefit pensions are becoming more obsolete, with only 22 percent of Fortune 500 companies currently offering them (compared to 60 percent in 1998). Today's retirees are leaning hard on their Social Security payments, which in December 2014 averaged $1,282.27 a month, according to the Social Security Administration. The New York Times reports that, for the majority of retirees, earning $32,600 annually, that monthly check makes up two-thirds of their income.
4. The Ratio of Taxes to Payout Is Shrinking
A 2012 study from the Urban Institute found that a dual-income couple in 1960 making an average salary would pay about $26,000 into the Social Security system in their lifetimes, and ultimately take out $269,000 in benefits -- meaning their benefits were roughly eight times what they were taxed. In 2010, that couple would have paid $523,000 in lifetime taxes but would only benefit from $877,000 in lifetime benefits -- only a third more than they put in.
5. All the Boomers Are Retiring at Once
One of the reasons for Social Security's continuing deficits is the influx of retirees, which is putting a strain on an already strained system. Every month, 250,000 more baby boomers turn 65, with many dropping out of the workforce. In 2010, 10 percent of boomers were retired; in 2014, that number had jumped to 17 percent.
6. People Are Living Longer
Social Security depends on the ratio of taxpaying workers to benefit-receiving retirees -- that ratio has to be front-loaded for there to be any kind of surplus. In 2011, there were 2.9 workers for every one retiree; the SSA estimates that will shrink to just 2-to-1 by 2035.
Part of this is thanks to the fact that people are living longer. Whereas just 12 percent of the population was 65 or older in the middle of the last decade, by 2080 retirement-eligible Americans will make up 23 percent of the population.
7. People Are Having Fewer Children
At the same time, decreased fertility rates mean fewer Americans are entering the workforce to replace retiring boomers. According to the SSA's chief actuary, Steve Goss, this is the primary threat to Social Security. According to CBS News, the birth rate has gone down since the 1960s by more than 30 percent -- one child for every three, say -- which means the number of Americans paying into the Social Security system is plummeting just as its number of beneficiaries is booming.
8. Benefits Are Growing Faster Than the Economy
A low birthrate and increasing number of retirees also means that the cost of Social Security is quickly becoming a larger percentage of the nation's gross domestic product. Just recovering, the U.S. economy isn't expanding fast enough to keep up with the increasing financial needs of the Social Security system.
9. First Beneficiaries Put Less In, Got More Out
Because the system wasn't pre-funded, the first recipients of Social Security put in a lot less and got a lot more out; that gap is still being subsidized by today's workers.
10. Income Inequality Is Eroding Social Security
A report released in February from the Center for American Progress, a slightly left-of-center public policy and research organization, found that the increasing income gap is putting less money into the Social Security system.
Here's why: The payroll tax that funds Social Security applies to income of $118,500 or less -- this cap changes year to year. But in the last several decades, income has disproportionately increased for the rich and remained more stagnant for lower brackets. In 1983, 10 percent of the nation's income escaped a Social Security tax, compared with 17 percent today.
With higher wages exempt from the tax, the system is losing out on money at a time when it needs it most. What's more, a lot of the money that top income brackets make doesn't even show up on a paycheck; earnings from investments and stocks, for example, fall under the capital gains tax.
Ultimately, according to the report, "upward redistribution of income in the United States has meant that income has shifted away from the workers whose full earnings are taxed and toward high-income workers whose additional dollars are exempt."
11. Social Security Benefits Could Get Cut
So what are the consequences of the Social Security trust funds rapidly becoming insolvent? Well, the Social Security program won't cease to exist -- taxes will still get taken out and benefits will still get paid, although they could get cut.
Recipients of disability payments could see a 20 percent cut as soon as 2016, according to The New York Times. Combined benefits, from both the disability and retirement trust funds, would be cut by about 25 percent if the funds run out as expected by 2033. That means retirees would be receiving checks that are about 75 percent of what they're used to.
12. Social Security Taxes Could Be Raised
To cover the gap between taxes and benefits -- and to prevent a possible benefit cut -- the SSA might have to increase the tax that's taken out of workers' paychecks. The current tax rate is 6.2 percent -- it hasn't budged since 1990, in fact. The New York Times argues that an increase of just 1 percent over 20 years could decrease the funding gap by half.
13. The Retirement Age Could Be Moved
The full retirement age to receive Social Security was bumped from 65 to 67 in in 1983 -- a slow bump, really, it was phased in over 20 years. Since then, some politicians and committees (like the Simpson-Bowles Commission in 2010) have argued that the threshold should be moved again to 69 to keep up with increased life expectancies.
The flip side, though, is that while Americans are living longer in general, the life expectancy for workers in physically demanding jobs has stayed the same -- same goes for racial minorities. Moving the retirement age, then, would have unequal benefits.
14. Trust Funds Are Invested in Low-Yield Securities
Whereas compounding interest will work wonders for your 401(k) or higher-risk investments, the Social Security trust funds were invested in Treasury securities -- much safer than the market, though also lower-yield.
15. Investing a Portion in Corporate Securities Could Be Risky
There would be a lot of prohibitive factors involved with putting those trusts in higher-earning vehicles, though. For one, many are queasy about putting government money in private corporations, where it could be depleted by fees and knocked around by the volatility of the market. What's more, because the Social Security Administration was able to loan out its surplus to fund other government programs (receiving the securities in exchange), the government was able to keep the national debt lower.
16. It's Not a Politically Convenient Time for a Fix
Granted, any time a president and the sitting Congress come from different sides of the aisle, it's difficult to make any sort of political maneuvers. But as 2015 begins, the new Congress is just settling in -- and, just this month, beginning to tussle with the president over a budget that includes a change to the disability trust fund. These (and future) fights will only become more heated as 2016, an election year, approaches.
17. The Social Security Administration Is Understaffed
The number of boomers retiring isn't the only factor affecting Social Security benefits. Facing budget cuts and with more of its employees nearing retirement age, the Social Security Administration is, as its acting commissioner Carolyn Colvin told Obama in a March report, stretched far too thin.
"Our service and stewardship efforts [have] deteriorated," Colvin wrote. "In fiscal year 2013, the public had to wait longer for a decision on their disability claim, to talk to a representative on our national 800 number, and to schedule an appointment in our field offices." Three out of every five SSA employees will be eligible for retirement by 2022. The administration has already lost 11,000 employees -- 12 percent -- in the last three years.
18. It's Losing Field Offices All Over
The SSA is additionally facing widespread office closures. According to The Wall Street Journal, 44 field offices have been consolidated, 503 mobile service stations have been shuttered, and plans to open eight hearing offices and one call center have been delayed.
19. Wait Times Are Increasing at the SSA's 800 Number
One result of understaffing is waiting a lot longer if you want to talk to a real, live human being on the phone. According to a report released by the SSA, anyone using Social Security's 800 number will be getting a busy signal about 14 percent of the time (up from 11 percent in 2011). Call wait times are also up, with the average at about 17 minutes; that's double the wait time in 2012.
20. The SSA Spent $288 Million in a Failed Attempt to Update
In 2008, the SSA decided to overhaul 54 outdated computer systems that process disability claims. This was a project the administration envisioned would take about two to three years, ultimately letting SSA employees nationwide file, process and track claims. Six years and $288 million later, the system still isn't up and running.
21. Most People Don't Know How Social Security Works
In 2010, the Financial Literacy Center asked Americans to grade themselves on how well they know the rules and requirements of claiming Social Security benefits. Only one-tenth of respondents gave themselves an "A," while more than double that -- 23 percent -- thought they deserved a failing grade. The survey also asked seven questions to judge how knowledgeable the respondents actually were, and the results were depressing: Only 4 percent earned an "A," while more than half received a "D" or "F."
These results jibe with a more recent eight-question quiz on crucial Social Security rules conducted by Financial Engines: 5 percent got full marks, while 45 percent got at least three out of the eight questions wrong.
22. People Aren't Working in Early Retirement -- and They Should Be
So what are people so misinformed about? For one, there's the complicated "earnings test" -- a cap on Social Security benefits that's enforced when someone under the retirement age is working and collecting benefits at the same time. It's a confusing rule that reduces benefits ($1 deducted from every $2 earned above an annual limit), and it keeps many Americans from trying to earn extra income in early retirement.
The annual limit for 2014 is $15,480; so, if you worked and received an income last year, half of the money you earn above that threshold will be deducted from your Social Security benefits. What most people don't know, however, is that the SSA will increase your future benefits after you hit retirement age to make up for what you lost.
This "should not be a disincentive to work," Andrew Biggs, a former deputy commissioner at the SSA, told The Wall Street Journal. "Over your lifetime, your total benefits will come out the same."
23. People Lose Lots by Collecting Too Early
Another important decision all future retirees will have to make is when to collect Social Security. Americans who delay collecting their first benefits -- if they can -- gain a huge edge in retirement. For example, if you start collecting benefits at 70, versus 62, your monthly payment will be 76 percent higher. Most financial advisors recommend trying to capitalize on this increase -- a couple that optimizes their benefits could see lifetime gains in excess of $250,000, according to Forbes.
Unfortunately, according to Financial Engines' survey, only 40 percent of respondents know about the percentage increase in monthly benefits owing to a delay of at least two years. That's a large chunk of retirees who could be missing out on tens of thousands of dollars in benefits -- all thanks to timing.
24. People Get Lower Benefits by Not Working for 35 Years
Another easy way to slash the amount of Social Security you get is to not work at least 35 years. That's because the SSA calculates your benefits based on the 35 years in which you earned the most income. If you've only worked, say, 31, those last four years are calculated as zeros, which will cause your retirement benefit to dip. Unfortunately, many people don't realize that continuing to work -- even part-time -- is a simple way to raise your Social Security benefits.
25. The SSA Won't Tell You About All Your Benefits
Don't expect the Social Security Administration to go out of its way to inform you of benefits you could be taking but aren't -- spousal, disability, survivor, etc. It's up to individual retirees to use software, advisers, the internet, etc., to make sure they're not leaving any money on the table. The administration also won't usually retroactively apply benefits you've missed (maybe within the last six months, but that's it). Do your due diligence to make sure you're not losing out on thousands of dollars that could be padding a comfortable retirement.
26. More Beneficiaries Will Owe Taxes on Benefits
There's a threshold at which Social Security benefits are taxed, and this cap has never been moved to account for inflation. (It's typically $32,000 for couples and $25,000 for individual beneficiaries). Because of this, it's becoming more likely that you'll owe taxes on your Social Security benefits by the time you receive them.
The New York Times reports that just 10 percent of beneficiaries had to pay taxes on their Social Security in 1984 when the tax threshold was instituted; by 2030, it's estimated that more than one in every two Social Security recipients will be taxed on some or all of their benefits.