Social security asset reserves will be gone by 2035: here’s what that means for you

Social security is in big trouble at 16. That’s the rough message of the 2019 Social Security Board of Directors report, which came out months before its regular release.

Social Security, which currently pays benefits to 63 million Americans and is responsible for at least half of the monthly income of more than 3 in 5 retirees, has struggled for some time now. In every annual report of the Trustees since 1985, it has been predicted that the program will not bring in enough income to cover long-term expenses, which is defined as the next 75 years. Simply put, if there isn’t enough money to cover the costs, it suggests that benefit cuts are coming.

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According to the most recent report, Social Security exceeded the 2018 forecast of a net cash outflow of $ 1.7 billion from the program and in fact generated a net cash surplus of $ 3.1 billion. A stronger economy certainly helped boost payroll tax collection in 2018. However, it should be noted that the net cash surplus of $ 3.1 billion was the smallest increase in security asset reserves. social (i.e. its total net cash surpluses since inception, which are currently invested in special-issue interest-bearing government bonds) since the last major overhaul of the program in 1983.

Administrators now predict that Social Security will generate a net cash surplus again in 2019, although it will decline even more, to just $ 1 billion, by the end of the year. This would bring the program’s asset reserves to a peak of nearly $ 2.9 trillion.

But then the you-know-what hits the fan.

From 2020 and for each subsequent year, social security should spend more money than it collects. This means that, little by little, the money accumulated since inception and invested in these special bonds will start to decrease. Based on the trustees’ projections, these asset reserves of nearly $ 2.9 trillion will be completely gone by 2035, a year later than expected last year and the 23rd time the depletion date has changed since 1985.

What does all of this really mean to you, whether you are currently receiving benefits, about to apply, or you may still be decades away from reaching your retirement age? eligible retirement? Let’s take a closer look.

Elderly man counting a fanned pile of cash notes in his hands.

Image source: Getty Images.

Social security asset reserve depletion date in 2035: here’s what it really means

The language of the report and subsequent headlines from major news outlets is probably creepy – and for good reason. Since most people depend on Social Security for a significant portion of their income during retirement, simply assuming that the program’s asset reserves run out by 2035 means Social Security won’t be there. for them when they retire. Fortunately, however, this couldn’t be further from the truth.

Social security is financed in three distinct ways:

  • The majority of the income generated by the program comes from the payroll tax of 12.4% on income earned up to $ 132,900 in 2019. This figure, known as the payroll tax cap , adjusts upward to the same level as the national average wage index almost every year. The exception concerns years when no adjustment to the cost of living is passed on to the beneficiaries. In 2018, the payroll tax was responsible for just over 88% of all revenue collected.
  • Then comes the taxation of social security benefits. If a single taxpayer’s modified adjusted gross income (MAGI) plus half of their Social Security benefits exceeds $ 25,000, or $ 32,000 for a couple filing jointly, up to half of those benefits could be taxed on the taxpayer. federal level. This tax, introduced in 1983 and implemented in 1984, gave rise to a second level of taxation in 1993 which made it possible to tax up to 85% of the benefits of an individual or a couple at the federal level. They exceeded $ 34,000 or $ 44,000, respectively, using the same MAGI formula plus half the benefits. In 2018, the taxation of benefits generated around 3.5% of all income.
  • Finally, there is the interest income that the program collects on its asset reserves of nearly $ 2.9 trillion. By law, these asset reserves must be invested in special issue bonds, with Social Security spreading this excess money over a multitude of maturities and available returns. In 2018, just over 8% of total income came from net interest income.

If and when the Social Security asset reserves disappear, there would no longer be any interest income generated for the program. However, the payroll tax and the taxation of benefits would remain in place. Since these sources of income combined for almost 92% of total revenue collected last year, Social Security would still have plenty of cash in the program for disbursements.

In other words, the payments will go on for a very long time, very long to come. The only thing that would actually jeopardize Social Security’s long-term solvency would be for Congress to change the way the program is funded.

Scissors cutting a $ 100 bill.

Image source: Getty Images.

And now the bad news

So the good news is that you can expect a Social Security benefit when you retire, assuming you have the 40 Lifetime Work Credits required to receive a Retired Worker Benefit. The bad news is that your benefits could be lower than your expectations due to changing demographics.

Once the Social Security asset reserves are gone, it essentially becomes a cash neutral program, assuming no amendments to the program are passed by Congress. The Social Security Administration (SSA) would need to cut benefits across the board – meaning for current and future beneficiaries – to accommodate its growing expenses. According to the trustees, this means reducing benefits by up to 20% in 2035 (and beyond). If that happened, the average Social Security benefit for retired workers would drop relatively near (but still remain above) the federal poverty line, in 2019 dollars.

Ultimately, the SSA recommends that the average retiree rely on Social Security to replace around 40% of their working wage during retirement, with low-income people perhaps leaning towards a slightly higher percentage and well-to-do workers. seeing a lower replacement percentage. . The point is, SSA doesn’t view Social Security as a primary source of income, and neither do you.

So that is the gist of the latest report: Social Security does not go bankrupt, but faces a sizable funding gap of $ 13.9 trillion between 2035 and 2093 if benefits are not reduced relative to that. at current levels.

The bigger question at this point is, when is Congress going to do something about this mess?

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