What Will Happen to Social Security?

February 8, 2010 4:43 PM
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How to fix Social Security is a topic that has been around ever since a demographer realized that the number of workers supporting an individual Social Security recipient was gradually dropping. When Social Security was first introduced, there were six or seven workers supporting each recipient. In 2008 the number of workers supporting a recipient was three, and in 2030 it will be two.

According to the Center for Retirement Research at Boston College, by the year 2016 Social Security will no longer be able to pay recipients without drawing on interest earned by the Social Security Trust Fund.

In 2024, payroll tax receipts and interest from the Trust Fund will not be enough and Social Security will need to sell the bonds in the trust fund to cover benefits. By 2037, the Trust Fund will be depleted (i.e., bankrupt). At that time, the Social Security payroll taxes will only cover seventy-eight cents of each dollar of promised benefits.

The figures from Social Security differ slightly from those of the Center for Retirement Research, but even Social Security admits that the Trust Fund will be depleted by 2041.

The way to fix the system is either to cut benefits, increase revenues, or a combination of the two. The Center for Retirement Research at Boston College has an excellent booklet, The Social Security Fix-It Book, which outlines the options that are before us. Individuals can download a copy of the booklet.

The remainder of this article will take a quick look at some of the options suggested. In addition to outlining the choices, the Fix-It book lists the pros and cons of each choice.

Under the category of benefit cuts, the options are:

  • An immediate across-the-board cut in Social Security benefits;
  • Raising the full retirement age (no mention is made of raising the age for early retirement);
  • Freeze the purchasing power of future benefits to current levels;
  • Freeze the purchasing power of future benefits, but use a sliding scale;
  • Adjust the annual cost-of-living adjustment by using a different measure of inflation;
  • Wait for 2037 and cut benefits then.

In the area of raising revenues, the options are:

  • Increase the payroll tax rate by 2% today. That would be 1% on the wage-earner and 1% on the employer, going from 6.2% to 7.2%;
  • Raise the earnings cap so that it will cover 90% of earnings. That would increase the cap from $106,800 to $172,000;
  • Use revenues from the estate tax to cover the shortfall (assuming there is an estate tax anymore);
  • Transfer Social Security start-up costs to general revenues;
  • Raise the return on assets. This is not private accounts; this is having SSA invest the trust fund in higher yielding investments;
  • Wait for 2037 and raise taxes then.

I suspect that Congress will be loath to address any meaningful Social Security reform for a while. After the dust settles from health care reform, it will be time to take a look at Medicare.

The Medicare Trustees estimate bankruptcy in 2017. Compared with 2037, that’s just around the corner.

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About the Author

John Grobe is President of Federal Career Experts, a firm that provides pre-retirement training and seminars to a wide variety of federal agencies. FCE’s instructors are all retired federal retirement specialists who educate class participants on the ins and outs of federal retirement and benefits; there is never an attempt to influence participants to invest a certain way, or to purchase any financial products. John and FCE specialize in retirement for special category employees, such as law enforcement officers.