By Marcia Mantell, RMA®, NSSA®
At about noon on March 30th, the Social Security Trustees issued their 2022 Report on the state of Social Security. By about 12:30, headlines were running amok. You may have seen alarming headlines such as:
- Social Security Trust Funds Projected to Be Depleted in 2034
- Social Security Trust Funds Depletion Date Moves One Year Earlier to 2034
- Social Security Retirement Fund on Track to Go Bust in 2033: Trustees Report
And, from the front page here at Retirement Daily, you’d have seen this headline: Social Security Trust Fund to Become Depleted in 2033 .
There were so many more. Retirees, near-retirees, and future retirees once again stopped in their tracks and wondered, “What is going to happen to my Social Security benefits?”
Why The Social Security Trust Fund is NOT Going Bankrupt
These headlines are certainly attention grabbers. And frankly, that’s the goal of a good headline. But when it comes to Social Security, these headlines strike fear in good people. And they are outright wrong.
Here are the facts:
The Trust Fund is not going bankrupt. Social Security is not going bankrupt. Hundreds of billions of dollars continue fueling Social Security. And will continue to do so as long as we have workers who earn wages.
The most fundamental part of the Social Security program is that workers pay into the system during their working years. Most American workers have jobs with “covered” employers. Simply put, those employers are required to pay FICA taxes—contributions into Social Security. Your salary gets docked 6.5% and your employer matches 6.5% for every pay period. These contributions “cover” you for future Social Security benefits.
With that in mind, let’s look at three reasons why Social Security cannot go bankrupt.
1. Social Security cannot file for bankruptcy.
Filing for bankruptcy is a legal process allowing individuals or companies to deal with their debt obligations. Social Security is neither a person nor a company. Furthermore, it does not carry debt obligations. Debts occur when one borrows money from a lender.
There are several “chapters” of the bankruptcy law under which someone could file. The ones we hear about most often are Chapter 7 and Chapter 11. There are also options to file for bankruptcy under Chapters 9, 12, 13 and 15.
Chapter 7 allows a person to file with the courts to clear their unsecured debt. They quite literally must sell personal assets to pay off as much debt as they can. Once their personal assets are liquidated, any remaining loan payments may be eliminated. In a chapter 11 filing, businesses file to reorganize their company to increase revenues and try to return to profitability. Their debts are adjusted and allowed more time to be repaid.
Again, Social Security is not a business or person. There is simply no way to file for reorganizing debt. Oh, and there is no debt here to be reorganized.
2. The “Trust Fund” Has Four Inflow Sources.
It’s helpful to think of the “Trust Fund” as a gigantic checking account. Money flows in, money flows out. There are four sources of incoming money into the Trust Fund:
- FICA taxes from worker payrolls
- Interest on investments
- Taxation of benefits
- General transfers from the Treasury.
Overall, in 2022, $945 Billion flowed in from FICA taxes. That represents 89.5% of all dollars coming into the Trust Fund. Interest on investments was $63.5 Billion, or 6% of inflows. Taxes on benefits paid to retirees and others totaled $47 Billion, or about 4.5%. General transfers were less than 1% at $183 Million. All in, over $1.056 Trillion came into the Old Age and Survivor Insurance Trust Fund. This fund pays retirement benefits and survivor benefits when a worker dies with dependents.
Each month as income flows in from FICA, outflows are paid to retirees, spouses, and qualifying family members and survivors. These payments are what you’re waiting to receive when you claim benefits.
In 2022, three categories of payments were paid out for a total of $1.097 Trillion:
- $1.088 Trillion went to retirees and dependents;
- $5.3 Billion was an interchange with the Railroad Retirement System; and
- $4.0 Billion was paid to administer the program.
If you follow the numbers, you’ll see that outflows were $40 Billion higher than inflows. And that is the problem.
3. The Issue is with the “Reserve Account,” Not Trust Fund Bankruptcy
When you run a company, a small business, or your personal checking account, you know you need more income than outflow. That extra cushion at the end of the month goes into a savings account or to build a rainy-day fund.
Financial experts around the country would tell you that is an especially important strategy for every household or business.
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In the case of Social Security, there is also a “savings account” or rainy-day fund. It’s been building since 1983. For 40 years, Social Security has been collecting more in FICA and other revenue streams than it has paid out. In Social Security lingo, this savings account is called the “Asset Reserve” account.
At the end of 2022, this Asset Reserve account held $2.71 Trillion. The savings accumulating in this account were earmarked to make up the anticipated shortfall between incoming FICA taxes and payments due to our retirees. This has long been identified as a demographic challenge: lots of Baby Boomers retiring and fewer Gen Xers to contribute to FICA.
Unfortunately, the Asset Reserve account is not sufficient to fill the payment gap indefinitely. In this year’s Trustees’ Report, the OASI Asset Reserve account is expected to be completely used up by 2034.
Exhausting the savings account does not mean the Trust Fund will be bankrupt. In fact, these other headlines correctly captured the dilemma:
- Social Security Will Not Be Able to Pay Full Benefits in 2034 if Congress Doesn’t Act
- Social Security Trustees Predict Reduced Benefits in 2033 Without Legislative Action
That is the situation. The inflows into the Trust Fund will continue every month. And payments to retirees will continue. A solution is needed now to address the expected shortfall in retirees’ payments in 10 years.
Only Congress can change the Social Security law to fix this well-known, well-documented, highly-anticipated problem.
Will Congress Step Up With a Solution? Not Soon
History sheds light on what we can expect from Congress in terms of shoring up Social Security so benefits do not get reduced in 2034. The last time “Social Security went bankrupt” was in 1982. Of course, it did not go bankrupt. But the Asset Reserve account was fully consumed.
Forty years ago, Congress allowed the rainy-day fund to be drained, then stepped in at the eleventh hour. They amended the Social Security law allowing some inter-fund transfers. No retiree missed a single payment or was shorted a single dollar.
The 1983 Social Security Amendments were then passed and signed into law bringing sweeping changes to the program. Not one retiree was shorted any benefits they had rightly earned.
- Read: The Future of Social Security: Look at History to Find Solutions
- Read: The Future of Social Security: Experts Weigh In
Those of us who closely track Congressional actions in the retirement arena are not surprised by this lack of action. Shoring up Social Security is not the most pressing issue on any Representative’s plate. They know they have plenty of time…ten years is a long time to take corrective action. And they know Social Security cannot go bankrupt!
So, wait and watch. Don’t claim benefits early unless that is truly in your retirement income plan. Work with a financial advisor who has expertise in building comprehensive retirement income plans.
Final Food for Thought
That the Asset Reserve account will be used to pay benefits is not new, or frankly, even newsworthy at this time. In 1992, the Trustees’ Report predicted this account would be depleted in 2036. Two years later, in 1994, expectations were the reserves would dry up in 2029. In 2002, the depletion date had moved back to 2041.
Since 2009, the estimated date for the Asset Reserve account to become exhausted has hovered between 2033 and 2037.
That is to say, the people who can change the direction of and solvency of Social Security have known for the last 30 years of this situation. We should only have to wait another 5-to-10 years for a solution.
About the Author: Marcia Mantell
Marcia Mantell is the founder and president of Mantell Retirement Consulting, Inc. , a retirement business and education company. She’s author of “What’s the Deal with Retirement Planning for Women,” “What’s the Deal with Social Security for Women,” “Cookin’ Up Your Retirement Plan,” and blogs at BoomerRetirementBriefs.com .
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