Will Social Security benefits be around when your kids retire? That’s more than just the $64,000 dollar question. You probably remember that quiz show, but your kids don’t — as they probably weren’t even born yet.
Right now, it appears that the program will tank for lack of money in the year 2035. According to the 2019 annual report of the Social Security Board of Trustees, the trust funds that disburse retirement, disability and other Social Security benefits will be spent by 2035.
This means that Social Security will have exhausted its cash reserves. Thus, your children will only receive an amount based only what it the program takes in year-to-year in Social Security taxes. In real money terms, Social Security would only pay 80 percent to those eligible.
Social Security Benefits: How The Calculations Work
The money in the trust funds — one for benefits paid to retirees and their families, and one for disability benefits — comes from three sources:
- 88 percent from the 12.4 percent Social Security tax paid on most American workers’ earnings, through FICA payroll taxes (and employer matches) or the SECA taxes paid by self-employed people through their IRS returns.
- 4 percent from income taxes Social Security recipients pay on their benefits.
- 8 percent from interest on the money in the trust funds.
The trust funds had $2.8 trillion in reserves at the end of 2018, but benefit payments going out are outpacing income, due to demographic and actuarial trends. The boomers are swelling the ranks of retirees, living longer, and hence collecting benefits, longer. Plus, lower birth rates in subsequent generations mean there are fewer workers paying into the Social Security Fund.
Future Possibilities If Nothing Is Done
The upshot is that if no changes are made, the system will run through its reserve assets by 2035.
For years, lawmakers and policy experts debated proposals to shore up Social Security’s finances. These proposals fall into two categories:
- Changing tax policies to steer more money into the trust funds,
- Tinkering with the benefit formula to reduce costs.
Keep in mind that FICA and SECA taxes also generate a revenue stream for Medicare. These monies flow into the trust fund that finances Medicare Part A (hospitalization coverage).
As detailed in the 2019 Medicare trustees report, that fund is under the same pressure as the Social Security trust funds due to demographic trends and rising costs.
Look for Congress to keep kicking the can the road until the 11th hour.