Although claiming Social Security benefits before full retirement age (FRA) results in permanently reduced monthly benefits, AARP reports that more Americans than ever are choosing to file early. While there are many reasons a person may claim Social Security early — including illness, job loss, or caregiving duties — an AARP poll suggests that the surge in claims is largely due to fears regarding the financial future of the Social Security program.
Americans are right to be on alert. For the first time since the 1980s, the Social Security trust funds are dangerously close to running dry, and it’s becoming increasingly difficult to develop realistic retirement plans. However, saying that Social Security is going bankrupt could not be further from the truth. Let’s separate the reality from the rumors.
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Social Security is more than the trust funds
Social Security is not going bankrupt, but it does face significant financial challenges that Congress will need to address. The trust funds (Old-Age and Survivors Insurance and Disability Insurance) are projected to be depleted by 2034. However, depletion doesn’t mean the program stops functioning. There will still be enough Americans in the workforce, paying Social Security taxes, to cover an estimated 75% to 80% of scheduled benefits.
What’s happening
Anyone watching how many children were born between 1946 and 1964 might have imagined that there would always be a large enough workforce available to fund the Social Security trust funds. After all, there were approximately 76 million people born in the U.S. — hence the nickname “baby boomers.”
By 2012, nearly 11 million baby boomers had died, leaving 65.2 million survivors. When immigrants were included in the number of Americans paying Social Security taxes, the total grew to 76.4 million. It appeared that Social Security benefits were secure for many decades.
Because Social Security is a “pay as you go” program, today’s benefits are funded by the payroll taxes collected from current workers. For decades, so many baby boomers were working that Social Security collected more in payroll taxes and other income than it paid in benefits and expenses. This provided the program with a healthy surplus.
Then, two things happened at the same time: Families began having fewer babies, and baby boomers began to retire. As the decades passed, and fewer new employees entered the workforce, the pressure on Social Security began to build.
The worst that could happen
For Americans building a retirement income strategy, it’s easy to imagine the worst. The very worst thing that could happen would be for the White House and Congress to repeal Social Security entirely. However, not only is that suggestion far-fetched, the discussion isn’t even on the table.
The next possibility is that the current level of Congressional infighting makes it impossible for Congress to adopt one of the dozens of solid solutions proposed by senior-citizen groups, think tanks, everyday Americans, and members of Congress. If Congress can’t manage to work together long enough to agree on a fix, benefits will be cut.
The reality is, this is not the first time Social Security recipients have found themselves in this position. In the early 1980s, with Social Security only weeks or months away from being able to pay full benefits, Congress cobbled together a bill that shored it up — proof that it can be done.
The bottom line is this: Social Security is not going bankrupt. However, Congress will need to work together to strengthen the program.
