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Little Known, Long Ago Decision Still Affecting Social Security Shortfall

Category: Financial and taxes in retirement

June 16, 2019 — Most of retirement age America, with the possible exception of our elected representatives in Washington, D.C., has some inkling that Social Security retirement is facing big benefit cuts as early as 2034. The commonly held reason why is that are too many baby boomers collecting their Social Security retirement checks, with too few millennials and Gen Xers paying into the system to keep it in balance. While that is not inaccurate, there is another, more fundamental reason for the shortfall, which dates back to the beginning of the Social Security program.

When the program started in the 1930’s there was an intrinsic problem.  Half of the working population at the time was at least halfway towards retirement age. Yet because the program was new, no one had yet contributed anything into the system. It was decided that these Depression-era workers would be given full benefits anyway. Enough money was being collected that benefits could be paid as these workers retired. So they essentially had a windfall – they collected far more than they ever paid into the system. The benefits paid to them would ordinarily have been paid into the trust fund reserves, forever reducing the trust funds.  In retrospect, it might have been better to have funded the shortfall from the general treasury at the time.

Now the piper is being paid. 2019 represents the first year that outgoing payments from the trust fund are greater than the money coming in from current workers.  By 2034 it is projected that the reserves will be completely exhausted, resulting in a 20% or so cut in promised benefits, unless something else is done.

Some experts believe that it doesn’t make sense to burden today’s workers for the decision made long ago to grant Depression-era workers full benefits. Taken to its logical conclusion, that argument would call for payments to the trust fund from the U.S. Treasury to get the trust fund back to where it should have been. Yet few think this has a chance of happening, since it would either add to the deficit or require higher income taxes.

Bottom line

It is a given that the Social Security Trust is going to be exhausted by 2034, unless something is done to fix it.  Whatever the solution, we should keep in mind how a long ago decision put us in this position. Something has to be done or the millions of Americans who rely on Social Security for their retirement are going to be thrown into poverty.

For Further reading

Posted by Admin on June 16th, 2019

3 Comments »

  1. “Something has to be done or the millions of Americans who rely on Social Security for their retirement are going to be thrown into poverty.”

    Social Security is still the third-rail of American politics. Does anyone REALLY believe nothing will be done? Does anyone REALLY think politicians will risk incurring the wrath of tens of millions of voters by cutting their current Social Security benefits? If you do contact me because I have a bridge that crosses the East River that’s been in the family for years that I can sell you for a great price!

    There will be some combination of higher FICA taxes, delaying FRA for future retirees and (possibly) some means testing (think $5-$10 million+ in financial assets for graduated benefit cuts). There is ZERO probability that any Congress or any President will let the system get to the point where significant benefit cuts for current retirees will happen – at least in my lifetime.

    by JD — July 10, 2019

  2. JD, I am in agreement with you. I’m 69 and have never in my life worried about “social security being there for me.” Congress would never ultimately take that political chance. I’m waiting until I’m 70 later this year to start claiming SS, making my monthly benefits about 63% higher than had I taken them at 62. And if
    I should die fairly early, my spouse will receive my full benefit as a surviving spouse, since my monthly payment is much higher.

    by Clyde — July 11, 2019

  3. From Motley Fool

    “Here’s what experts predict about Social Security benefits
    If you’re thinking you’ll be left out in the cold when it comes to Social Security benefits, you’re probably worrying for nothing. At least according to the Center for Retirement Research at Boston College, which analyzed the 2018 Social Security Trustees Report.”

    see the whole report: https://www.fool.com/retirement/2018/11/13/will-social-security-run-out-before-you-retire-her.aspx

    by Steve — July 12, 2019

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