In spite of almost daily claims by the crisis-obsessed media and politicians that Social Security is going broke and those who paid into it over their careers are at risk of losing their benefits, everyone can put their mind at ease because that is not going to happen. Social Security is a pay-as-you-go program with current wage earners and their employers paying into the system and then those dollars, along with prior excess contributions held in a trust fund, are used to pay benefits to current beneficiaries. The real issue which is creating so much confusion is that the trust fund is being exhausted. While that is true, Social Security will not become bankrupt.
First, a bit of background. Social Security was created in 1935 during the Great Depression under the administration of President Franklin D. Roosevelt, initially to keep the elderly from extreme poverty. It was very controversial and would not have passed had it not been for the efforts of a Mississippian, Senator Pat Harrison from Crystal Springs, later Gulfport who was chairman of the powerful Senate Finance Committee. Employees pay a total of 7.65% of their wages as FICA taxes (Federal Insurance Contributions Act). That includes 6.2% of wages up to $160,200 (in 2023) for Social Security and another 1.45% for Medicare, but with no wage limit on the Medicare tax. Additionally, their employer matches that 7.65% for a total tax of 15.3% annually. Once eligible, retirement benefits can begin as early as age 62 but the longer you wait, the higher the benefits, which are also adjusted annually with inflation.
From its inception in 1935, more money was going into the system than was being paid out in benefits. Those excess dollars went into a trust fund and were invested in short-term U.S. Treasury securities to earn interest. That fund grew over time but started to decline in value as the ratio of workers to retirees fell and because people are living longer. The fund’s trustees now estimate it will be exhausted in about ten years. When that happens there will not be enough money coming in to pay 100% of each claimant’s monthly benefit, thus the hysteria being stirred up by the media. Without action, it is estimated that beneficiaries will suffer a 20% reduction in benefits. Social Security is an evolving program with more than 20 amendments since its creation and it will continue to adapt to challenges it faces over time.
Congress will act to shore up the system yet again to ensure its solvency and ability to pay full benefits. The most common tweaks being discussed are (1) slightly increasing the tax rate paid by employees and employers, (2) increasing the wage base on which the tax is imposed, (3) increasing FRA (Full Retirement Age), currently 67, and (4) making Social Security fully taxable. Currently up to 85% of benefits are subject to federal income tax. Mississippi, a retirement friendly state, does not tax Social Security benefits or qualified withdrawals from retirement plans or IRAs. Since whatever Congress does will be unpopular, it will likely wait until it will be forced to act but act, it will. Social Security has been and will remain a guaranteed income-stream retirees and their beneficiaries cannot outlive.