400401402 wrote: ↑Wed Aug 19, 2020 12:03 pm
I feel this is alarmist, atleast for now and in the near future (10-15 years), especially if we carefully dissect the facts presented below.
1. The #1 thing we have to remember is Social security is a pay-as-you-go scheme. Which means current tax payers fund current beneficiaries ( beneficiaries are defined by law based on age, disability, survivorship etc.). This is very different from a defined contribution (401k etc.) and defined benefit (pension funds) plan structure which depend on investments and returns they generate, and is arguably more closer to general budget where current tax payers fund current expenses from federal(think defense) to local (school) level.
2. From point 1, assume a simple scenario for illustration. 12.4% of first $137K of one's income (6.2 empployer +6.2 employee) go into OASI (Old age and survivor's insurance) trust fund , 1.8% of first $137K of one's income (0.9 each by employer and employee) go into DI (Disability insurance) trust fund(think of trust fund as operating account). Lets assume OASI trust fund received $100mn in a year and the SSA's beneficiaries needed exactly $100 mn to be paid out based on eligibility criteria that year - Just like a general budget, 100mn flowed in and 100mn flowed out with no surplus and no deficit; it's that simple. But this ofcourse is such a long odds scenario. Any given year receipts into trust funds will not exactly match outflows to the penny.
3. Up until 2000s, receipts into OASI and DI trust funds (the two are legally seperate, former pays age and survivor based payments, latter pays disability payments) were higher than outflows - boomers hadn't started retiring, there was large enough workforce and receipts than beneficiaries. So all the surplus over years till 2000s started accumulating in the trust funds. The trust funds lent to federal government to earn some interest on these surplus funds by buying special non tradeable/markeatble bonds issued by federal govt.
4. In early 21st century, the tide turned and the yearly payments to beneficiaries started becoming more than the receipts into trust funds that particular year. Still not a problem, because remember the trust funds built a considerable surplus for all the years, so any deficit for any given year was addressed by tapping into built up surplus (which also was appreciating due to interest payments on those bonds)
5. The current situation is that 89% of 2019 payments to OASI beneficiaries was met by payroll tax receipts in 2019 (which is still pretty good), 7.6 percent of payments was funded by tapping into surplus funds and the interest they generated and the other 3.6% was funded by federal income taxes that were paid on social security income by beneficiaries (yes some portion of this goes back into the trust fund again)
6. The current actuarial projection is that current year receipts will fund only 76% of current year payments in year 2035 (as against 89% today) and the surplus will evaporate in 2035
With the above facts in mind:
A. Social security is not even remotely close to an underfunded pension plan / defined benefit plan, its much better. Unless it's apocalypse, US will have considerable workforce even in 2035 or even 2050 (assuming current laws stay because I can't speculate) funding then beneficiaries. If this is not the case, then there are much bigger problems in this world than collecting social security (as said apocalypse)
B. Even with current actuarial projections (which assumes the payroll tax rates stay at current levels and the workforce/employment rate is at current levels) one is poised to still get 76% of benefits in 2035. So unlike a defined benefit plan / pension fund/defined contribution plan which may go under unless there is zero workforce in 2035 or 2060 and assuming current payroll tax rates/current laws, one may expect a reduced payment but never a zero payment or going over the cliff scenario. So one can always go by actuarial projections which are pretty conservative and plan around them (75% of current benefits) though congress need not address this topic until 2035
Having said all this, for some one like me in 30s, I know the deal. I contribute to social security now to benefit my fellow older residents (which is the social contracts I signed up for and respect) and plan my future where social security payment may be an icing on the cake but not my main source of income (which is why we are all on bogleheads
But for some one in their 60s, I feel they need not even think about the worst case social security scenarios as from the explanation above, it's not even remotely close to reducing payments till 2035.