Great news: Social Security won't face any cuts next year

The Social Security program is vital to the financial livelihood of tens of millions of senior citizens. Unfortunately, it's also a program that's in dire need of assistance from Washington.

Are Social Security benefits going to be cut?

When Social Security came into being more than 80 years ago, the program's architects never foresaw the rapid rise in baby births after World War II, nor could they have foreseen that improved health education, medicines, and access to healthcare would so dramatically lengthen life expectancies in the United States. Today, the ongoing retirement of baby boomers and longer life expectancies are weighing on Social Security.

According to the Social Security Board of Trustees 2016 report, the program will begin paying out more than it's bringing in by the year 2020, ultimately resulting in the complete depletion of its more than $2.8 trillion in spare cash by 2034. Should this spare cash be eliminated, Social Security would essentially become a budget-neutral program. In other words, what's collected via payroll taxes would be redistributed to beneficiaries.

Should Social Security become budget-neutral, it would almost certainly mean that existing and future beneficiaries would receive less each month. The Trustees report estimates that an across-the-board benefits cut of up to 21% may be needed to extend the life of the program through 2090, assuming Congress makes no changes to the current Social Security laws.

In short, the closer we move to 2034, the more urgent it becomes for the president and Congress to act.

The 13 states that tax Social Security benefits
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The 13 states that tax Social Security benefits


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New Mexico

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North Dakota

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Rhode Island





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West Virginia

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President Trump's take on Social Security reform

During his campaign, President Trump made it crystal clear that he had no intentions of altering Social Security directly. In Trump's opinion, America has a promise to keep with its senior citizens, and that involves keeping the current benefit structure for Social Security as-is.

Instead of directly making changes to Social Security, Trump's proposals focus on indirectly helping the program by focusing on economic growth. In theory, if Trump can increase the GDP growth rate and simultaneously increase the income of the average American worker, then more money should be collected via payroll taxes, which are the primary source of funding for the Social Security program.

Trump plans to accomplish his goal of faster economic growth primarily by focusing on tax reform. Trump's campaign proposals (which may not be exactly the same once Congress makes some expected adjustments) would simplify and lower individual tax brackets, as well as dramatically cut corporate income tax rates.

In addition to tax reform, Trump has plans to boost infrastructure spending, renegotiate foreign trade deals, and deregulate a number of industries to promote growth, including the banking and energy sectors.

25 Social Security facts & figures you need to see
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25 Social Security facts & figures you need to see

1. 60.66 million

As of the September 2016 snapshot from the Social Security Administration (SSA), 60.66 million people were receiving monthly benefits, two-thirds of whom are retired workers. A little more than 6 million survivors of deceased workers and 10.6 million disabled persons were also receiving monthly benefits.

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2. 5.44 million

Social Security's beneficiary base is increasing rapidly due to the ongoing retirement of baby boomers, which is expected to last until about 2030. As such, 5.44 million people were newly awarded Social Security benefits in 2015. 

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3. $1,300

It's important to understand that Social Security isn't an entitlement, though the requirements for a guaranteed benefit are not too high. You need 40 lifetime work credits to qualify for Social Security benefits, and a maximum of four credits can be earned annually. In 2017, one work credit is equal to $1,300 in wages. Simply earn $5,200 in 2017 and you'll have maxed out your work credits for the year. Do that 10 times and you'll be guaranteed benefits when you retire.

4. 96%

Based on statistics from the SSA, nearly all working Americans (96%) are covered by survivors insurance protection. Though Social Security is primarily designed to provide financial protection for retired workers, it does provide benefits for the spouses, children, and in rarer cases parents of deceased workers.

5. 90%

To add to the above statistic, the SSA also points out that 90% of the American workforce is covered in case of long-term disability. Since nearly 70% of all private sector workers have no long-term disability insurance, it's good knowing that Social Security has their back.

6. 55%

An interesting figure from the SSA is that 55% of beneficiaries are women. Social Security income is of particular importance to women since 1) they tend to live about five years longer than men, on average, and 2) they're often the caregivers that take care of the kids or sick family members, thus their lifetime earnings are often lower than their male counterparts'. Social Security income can be critical to ensuring a healthy financial foundation for women come retirement.

7. 32%

According to an analysis conducted by the Center on Budget and Policy Priorities (CBPP), Social Security income has reduced what would be a 40.5% poverty rate for seniors without this added income to just 8.5%. While the CBPP's analysis can't factor in external variables such as how much extra seniors would have saved prior to retiring if Social Security wasn't available, it's clear as day that Social Security is critical to keeping seniors on solid financial footing. 

8. 81%

Based on data from the SSA, 81% of all benefits paid out by the Old-Age, Survivors, and Disability Insurance Trust (OASDI) are heading to seniors ages 62 and up. Just 5% go to children under the age of 18, and another 14% to adults between the ages of 18 and 61.

9. 61%

Statistics from the SSA in 2016 show that 61% of seniors rely on Social Security to provide at least half of their monthly income. For elderly couples this figure was 48%, while 71% of unmarried elderly persons lean heavily on the program for at least half of their monthly income.

10. $920.2 billion

The SSA's data showed that $920.2 billion was collected from three revenue channels in 2015. A majority of this revenue came from payroll taxes (86.4%), while interest earned on the OASDI's spare cash (10.1%) and the taxation of benefits (3.4%) comprised the remainder.

11. 12.4%

Payroll taxes comprise the lion's share of revenue collection for Social Security. This tax totals 12.4% of wages (up to a certain point, which is discussed below) and it's typically split down the middle between you and your employer, with each paying 6.2%. If you happen to be self-employed, you're on the line for the entire 12.4% tax.

12. $127,200

There is, however, a cap on how much a person can be taxed by the SSA via the payroll tax. All earned income in 2017 between $1 and $127,200 is subject to the 12.4% payroll tax. Any wages beyond that point are free and clear of being taxed by the SSA.

13. $1,351.70

The September 2016 snapshot shows that the average retired worker is bringing home $1,351.70 per month, or $16,220 over the course of a year. Annual benefit increases are tied to the inflation rate as measured by the Consumer Price Index for Urban Wage Earners and Clericals Workers, or the CPI-W. 

14. 0.3%

Speaking of inflation, Social Security beneficiaries are getting a 0.3% cost-of-living adjustment (COLA) in 2017, the smallest increase on record. Social Security's COLA has been dragged down in recent years by weaker energy and food costs, which are sizable components of the CPI-W.

15. 33 out of 35 years

One of the more saddening facts and figures about Social Security is that its COLA has been lower than medical cost inflation in 33 of the past 35 years. The CPI-W factors in a number of varied expenses, but medical costs are a much smaller portion of workers' average expenditures. Seniors spend double what urban wage earners and clerical workers do on medical costs as a percentage of their annual expenditures.

16. $2,687

Social Security benefits are capped at $2,687 per month, which makes sense given that payroll taxes have an annual cap as well. The monthly benefit cap is usually adjusted year-to-year based on inflation. Only a small fraction of Americans have a shot at reaching this maximum payout, as you'll see in the next figure.

17. 60%

Based on data from 2013, as assembled by the Centers for Retirement Research at Boston College, 60% of retirees sign up for benefits before reaching their full retirement age (FRA). A person's FRA is when they become eligible to receive 100% of their FRA benefit. By signing up early, retirees are taking a cut in benefits from their FRA benefit of up to 25% to 30%.

19. 2.8-to-1

As of 2015, the worker-to-beneficiary ratio stood at 2.8 workers for every one beneficiary. In about two decades, this ratio is forecast to drop to 2.1-to-1. In simpler terms, baby boomers are retiring in increasing numbers, and there simply aren't enough new workers to take their place and maintain the worker-to-beneficiary ratio at its current level. This leads to the next point...

20. The year 2020

Based on the latest report from the Social Security Board of Trustees, by 2020 the cash inflow into the OASDI is slated to turn into a cash outflow. In other words, what's expected to be close to $2.9 trillion in spare cash will begin dwindling in 2020.

21. The year 2034

Perhaps the scariest finding of the Trustees' report is that Social Security's spare cash is expected to be exhausted by the year 2034. Assuming Congress passes no new laws affecting Social Security, the Trustees predict that an across-the-board benefits cut of up to 21% may be needed to sustain payouts through the year 2090.

22. 2.66%

Findings from the Board of Trustees report also showed that the actuarial deficit in 2016 was 2.66% for the program. In easier-to-understand terms, a 2.66% increase to the payroll tax would be expected to alleviate all funding concerns through the year 2090. This would mean an increase to 7.53% if you're employed by someone else, or 15.06% if you're self-employed.

23. 56%

It's a fact that gets overlooked by many seniors, but Social Security income may be taxable. Individuals earning more than $25,000 annually and joint filers with income over $32,000 could have a percentage of their Social Security benefits taxed. Not to mention 13 states also tax Social Security benefits.

24. 51%

According to Gallup, 51% of polled Americans in 2015 believed Social Security won't be there for them when they retire. Luckily, this is blatantly false. Social Security is essentially incapable of going bankrupt because it'll always be collecting payroll tax revenue from the workforce. Benefits may indeed need to be cut, but the program will be there for many generations to come.

25. 28%

Finally, a survey conducted by MassMutual Financial Group in 2015 found that just 28% of the more than 1,500 respondents who took its quiz received a passing grade and correctly answered at least 7 out of 10 multiple choice or true/false questions. Only 1 respondent out of more than 1,500 got all 10 questions correct. It's a stark reminder of just how little Americans know about Social Security.


Great news for Social Security beneficiaries

Despite Trump's pledging to leave Social Security alone, there has been some consternation that Republicans, who currently control the legislative branch of the federal government, could push for Social Security cuts in the 2018 budget in order to reduce the federal deficit. The good news for Social Security beneficiaries is that a benefits cut is clearly not on the table for 2018.

In a recent interview on Fox News' Sunday Morning Futures, U.S. Treasury Secretary Steven Mnuchin noted that Trump's top budget priority for the upcoming year is on tax reform and not cutting entitlements. In Mnuchin's own words, based on a transcript provided by Fox to Fortune:

"We are not touching those [Social Security and Medicare] now. So don't expect to see that as part of this budget, OK. We are very focused on other aspects and that's what's very important to us. And that's the president's priority."

Not only are Social Security funding cuts not in the 2018 budget, but a stronger COLA may also be on the way for retired workers. Bureau of Labor Statistics data from January shows that the annual inflation rate hit 2.5%, which is its highest level in five years, mostly on account of higher energy prices. The Consumer Price index for Urban Wage Earners and Clerical Workers (CPI-W) determines the annual cost-of-living adjustment (COLA) for Social Security each year. In recent years, the CPI-W has been dragged down by lower energy prices. However, energy prices have been substantially stronger on a year-over-year basis.

In short, Social Security recipients won't be worrying about a benefits cut in 2018 and they could be in line for a healthy COLA.

Social Security's future is still murky at best

But it's probably best to hold off on uncorking the champagne just yet. Even though Trump has regularly denied that he would directly alter Social Security, he's surrounded himself with lawmakers who strongly believe in modifying and potentially cutting it.

For example, Trump's budget director Mick Mulvaney is a strict fiscal hawk. In simpler terms, he's all for a balanced budget, which means making spending sacrifices in certain areas, perhaps including entitlement programs such as Social Security.

Previously, Mulvaney has supported increasing the full retirement age to 70 from the expected 67 that'll be reached by 2022. Your full retirement age is the point at which you're entitled to 100% of your monthly benefit. Increasing the full retirement age wouldn't hurt already retired workers, but it would reduce payouts for future generations of retirees by forcing them to either wait longer to receive 100% of their monthly benefit or accept a steeper reduction in their payout by claiming early.

Yet, Mulvaney is far from the lone wolf. Former Dallas mayor Tom Leppert, who Trump chose as his Social Security adviser, previously trumpeted an idea that would partially privatize Social Security. Privatization involves moving a percentage of a beneficiary's future payouts into a separate retirement account that they would be allowed to invest as they see fit. Leppert, like many Republicans, would like to see as little involvement from the federal government as possible, meaning placing some of the onus of retirement back on working Americans.

While Social Security appears to have escaped any major modifications for the 2018 budget, Trump may have little choice but to accept the possibility of overhauling Social Security in 2019, or soon thereafter.

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