With an estimated nine out of ten Americans 65 and older receiving Social Security benefits, chances are you’re either collecting now or on your way there. The fact is that Social Security is a universal benefit that affects all of us to some degree, no matter what our income or assets. For roughly 71% of single or widowed retired beneficiaries, Social Security provides over half their yearly income. For a third of those people, that figure jumps to 90%. Overall, an astonishing 97% of elderly Americans are either receiving benefits now or will in their lifetime.
So the solvency of Social Security is an issue that impacts us all, and one that’s a hot topic of speculation, because of a particular confluence of two factors: the influx of Baby Boomers reaching retirement, along with the rising cost of ancillary Social Security benefits like health insurance. With the Social Security Commission projecting that the fund will be exhausted by 2037, the burning question is – is Social Security headed towards bankruptcy?
The answer, by the overwhelming majority of experts on both sides of the political aisle, is a resounding no. To understand why, it’s helpful to start with how Social Security is funded. Here are the three primary sources.
- Payroll Tax: As of 2018, Social Security collects a 4% payroll tax on earned income between $0.01 and $128,700. Any income above this threshold is not subject to the payroll tax. Side point worth noting: most workers pay only half of the payroll tax (6.2%), with their employer covering the rest. In 2016, the payroll tax generated 87.3% of the $957.5 billion collected for Social Security.
- Interest Income: Social Security currently has more than $2.9 trillion in excess cash that gets invested in special issue bonds and certificates of indebtedness. The interest earned on these asset reserves netted more than $88 billion for the program in 2016.
- Taxation of Benefits: Depending on your income, a portion of the payments you collect may be taxable, up to 85% of your benefits. This tax revenue provided the government nearly $33 billion in 2016, or slightly more than 3% of what the program collected.
The fact is that since the mid-1980s, Social Security has collected more in taxes and interest income each year than the amount of benefits it has paid out, and has built combined trust funds of nearly $3 trillion, all invested in interest-bearing securities. So while certain aspects of the fund have had to be tweaked over the past decades, its reserves have never fallen below the amount needed to pay benefits due.
Nonetheless, projected funds available will not be enough to ride out the spike in Baby Boomer payouts and continue paying Social Security 100%. Despite the fact that the average American’s payment is quite modest (only $1,322 a month in 2017), Social Security will indeed run out by 2037 as projected. But this does not mean the fund will be bankrupt; thanks to payroll tax revenues, Social Security will be able to meet three-fourths of payment amounts due, with no government intervention. The real issue is the government’s ability to keep paying retirees 100% of what they are owed; in order to meet that obligation, adjustments to available revenue streams will have to be made, either in the form of tax increases or benefit cuts. Without such action, the Social Security program Americans have largely depended on for decades will look very different by the time the current workforce hits retirement.
There are lots of helpful resources out there to help you track this important issue as it develops. For a complete list of government resources, non-profit organizations, and press outlets covering this important topic, head to our recent blog post on the basics of Social Security.