The Health of Social Security Unchanged

According to the 2014 Trustee’s report released in late July, not much has changed on the Social Security funding front. The assets for Social Security Old Age and Survivor Insurance (OASI) are expected to last until 2033. This is the same as last year’s report.

In the report to Congress, the Trustees said that the combined trust fund reserves are still growing and are expected to continue growing through 2019. At that time, the cost of benefits will be greater than the revenue coming in from payroll taxes and interest earned on the assets.

If nothing is done, Social Security is expected to run out of funds in 2033. That doesn’t mean that benefits won’t be paid out any longer, but they could be reduced. At that time, the income coming in is projected to cover just 77 percent of the benefits payable.

The news for Medicare was better. In the 2013 report, funds for Medicare were expected to run out in 2024; in the 2014 report, funds are expected to last until 2030.

While Social Security will definitely need to be reformed, it’s not going broke as many people would have you believe. Some of the changes we might see in the future to improve the health of Social Security include:

Raising the income cap: In 2014, the maximum amount of income that you will pay Social Security tax on is $117,000. One proposal is that people who earn over $250,000 should not have an income cap (while people earning less than that would continue to be capped at $117,000).

Increasing the full retirement age (FRA): People who were born between 1945-1956 currently qualify for full retirement benefits at age 66. People born after 1956 must wait longer to collect their full benefit. The full retirement age increases by two months for every year you were born after 1956, up to an FRA of 67 for people born in 1962 and later. The FRA could go up even more in the future.

Reducing or eliminating the COLA. Social Security benefits have received an average increase of 2.8% to help with rising costs. There have been many proposals to change how the COLA is calculated by people who believe the increase is too high. One suggestion which received great criticism is using the chained CPI, which would reduce the amount of increase each year substantially. This proposal has received the most controversy of all the proposals so far.

Reducing benefits for high income earners (otherwise known as “means testing”): There are several proposals to cut benefits for people who are considered high earners. Some propose that only those in the top quartile should be cut, other proposals say people in the top 50 percent of income earners should receive reduced benefits. Since this would include many Congress members, I’m not sure how likely this is to pass, but it has been proposed several times.

Taxing benefits for high income earners: Along the same lines, another proposal is to increase the tax that people with other income pay on their Social Security benefits. Currently, you only pay taxes on your Social Security benefits if you have combined income of $25,000 or higher ($32,000 for married couples). This income limit could be reduced, or the amount of benefits taxed could go up.

Reducing benefit amounts: This is probably the least likely to happen. The outrage and backlash from a decrease in benefits would be severe, so I expect this option would not take place unless Social Security was in dire straits and other actions were not successful in saving Social Security.

One consequence of the reports that Social Security is going broke is that many people are taking benefits as soon as they are eligible. This may or may not be the best strategy, but fear that Social Security will go broke or that benefits will not be paid at some later date cause people to make irrational decisions, including taking benefits early.

While I believe that some changes will need to be made to make Social Security stronger, I don’t believe that it will go broke. There are many filing strategies available, so you should learn as much as you can about Social Security before you retire to make sure you are getting the maximum benefit you are entitled to.