Every year the Social Security Board of Trustees releases a report on the status of the Old Age and Survivors Insurance (OASI) trust, which pays benefits to retired workers and the survivors of deceased workers. According the 2020 report, 2021 with be the first year of negative cash outflows, meaning benefits paid will be greater than the tax revenues and interest income from the assets in the trust. These outflows will begin to exhaust the trusts reserves until 2034 when the OASI Trust runs out of money.
What happens to the benefits paid by the programs if/when the trust funds are actually depleted? The answer is they can continue paying as much of the benefits as they can manage, simply using the ongoing tax revenues that are still being collected. And how much is that? 74%! This is a big contrast to the assumption that “bankrupt” actually means ALL benefits will cease and a drop-off 100% of the benefits instead of 24%.
*Note – The impact of COVID 19 and the Payroll Tax “Holiday” were not included in the 2020 Trustee report. Both of these events will likely negatively affect the funding of the OASI Trust and likely accelerate its depletion.
How did this happen?
- Lower birthrates and lower immigration have reduced the numbers of workers paying into the program
- People are living longer in retirement and are receiving benefits for longer.
- Congress has been reluctant to introduce meaningful policy reform to address this issue
- Low interest rates have reduced the income generated on the trust’s assets
- Increasing taxes would raise the revenue going to fund benefits being paid. This could be done by raising the payroll tax rate, eliminating the payroll tax earning cap, or increasing the taxes on Social Security benefits.
- Reducing benefits would decrease the money flowing out of the system. This could be achieved by increasing the full retirement age, change how the cost-of-living-adjustment (COLA) is calculated, or using means-testing to reduce benefits to those with significant retirement assets or benefits.
Implications For Your Retirement
- If you are already retired you are unlikely to see a change in benefits and any cuts will likely only occur to people who retire after reserves are exhausted.
- If you are near retirement, you must decide if delaying social security is appropriate and consider the impact of potential tax changes.
- If retirement is far away you can model the worst-case scenario of a 24% reduction in benefits and stay up to date on changes to the program as they occur.
Although there are pending issues that need to addressed, Social Security may change, but will almost certainly be there when you retire. MOST of the benefits paid out are funded from current tax revenues from current workers and the purpose of the OASI trust is to pay the difference. With this knowledge one must plan according and make decisions based on current information and be to adapt as new information arises.
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