A Report on Social Security's Projected Solvency

A Report on Social Security's Projected Solvency

Communicating important financial matters that impact our clients and communities is a priority for our firm and is one of the primary focuses of our periodic thought pieces. As such, we have reviewed the recent report released by the Trustees of the Social Security Trust Funds for 2014. We will, of course, remain focused on this important planning factor, and adjust our clients’ financial plans as required to reflect the questionable solvency of the Social Security program. We look forward to your feedback and questions on our below review and analysis.

A Review of the 2014 Social Security Trustees Report

Every year, the Trustees of the U.S. Social Security Trust Funds release a report to Congress on the current financial condition and projected financial outlook of the Social Security system. Released on July 28th, this year's report contains valuable information about the state of Social Security that may help you understand how your benefits may be affected.

The Social Security program provides for two primary beneficiary groups: 1) Retired workers, their families, and survivors of workers receiving monthly benefits under the Old-Age and Survivors Insurance (OASI) program; 2) disabled workers and their families receiving monthly benefits under the Disability Insurance (DI) program.

Each program has a financial account that holds the Social Security payroll taxes that are collected to pay benefits accordingly. Other income (reimbursements from the General Fund of the Treasury and income tax revenue from benefit taxation) is also deposited into these accounts. Money that is not needed in the current year to pay benefits and administrative costs is invested (by law) in special Treasury bonds that are guaranteed by the U.S. government and earn interest. As a result, the Social Security Trust Funds have built up reserves that can be used to cover benefit obligations if payroll tax income is insufficient to pay full benefits.

Report Conclusions

"The [Social Security] Trustees recommend that lawmakers address the projected trust fund shortfalls in a timely way in order to phase in necessary changes and give workers and beneficiaries time to adjust to the changes. Implementing changes soon would allow more generations to share in the needed revenue increases or reductions in scheduled benefits. Social Security will play a critical role in the lives of 59 million beneficiaries and 165 million covered workers and their families in 2014. With informed discussion, creative thinking, and timely legislative action, Social Security can continue to protect future generations."

Clearly, action needs to be taken soon if the country intends to address the DI program's reserve depletion. According to this year's report, in the short term, lawmakers may reallocate the payroll tax rate between OASI and DI (as they did in 1994). However, this will likely simply delay DI and OASI reforms.

Some long-term reform proposals on the table are:

  • Raising the current Social Security payroll tax rate (according to this year's report, an immediate and permanent payroll tax increase of 2.83 percentage points would be necessary to address the revenue shortfall)
  • Raising the ceiling on wages currently subject to Social Security payroll taxes ($117,000 in 2014)
  • Raising the full retirement age beyond the currently scheduled age of 67 (for anyone born in 1960 or later).
  • Reducing future benefits, especially for wealthier beneficiaries Changing the benefit formula that is used to calculate benefits
  • Changing how the annual cost-of-living adjustment for benefits is calculated

 What can individual Social Security participants do? Below are some recommendations for mitigating the risk of this shortfall impacting you:
Follow the news to learn about new developments or proposed legislation to reform Social Security – we will do our best to keep you posted through our thought pieces.

  • Consider various income scenarios when planning for retirement.
  • It goes without saying that focusing on saving as much for retirement as possible to mitigate your dependency on Social Security will help you to rely less on this precarious benefit.