Social Security Depletion: Is The Fear Justified?

By James E. McWhinney
March 9, 2010

Scary headlines about the depletion of the Social Security program have been in the news for years. The grim text on the yearly statement sent to future Social Security recipients doesn't help matters, with its dire warning that the Social Security Trust Fund will be exhausted if changes to the program are not made. In fact, recent estimates suggest that the depletion could occur by 2037, four years earlier than expected. (You've probably contributed to this fund, but will you reap the benefits?

The growing budget deficit, increased life expectancy, inflation and a growing elderly population are some of the pressing reasons the concern has emerged. Medicare and Medicaid reforms among other measures are currently being targeted as a means of avoiding collapse of this multi billion dollar system.

Exhausted? Yes. Broke? No.
Despite all the noise around this subject, there is still plenty of money available today. As the chart below shows, the Social Security trust fund had a surplus of $2.5 trillion at the end of September 2009. Although these funds will have to be increased to satisfy future demand, they provide a safe cushion in the short term.

Even after the fund is depleted, benefits will still be paid because taxpayers continue to pay taxes. When the trust fund is empty, revenues from the payroll tax on Social Security will continue to provide enough cash flow to fund benefits at 75% of their expected levels. Of course, this may imply a necessary increase in taxes. (You've been paying in for years - now it's time to find out what the system owes you. Check out How Much Social Security Will You Get?)

Since Social Security recipients receive annual cost of living increases, the amount of money paid out continues to rise each year. For many of today's taxpayers who won't be eligible to receive Social Security benefits until after the date the trust is exhausted, those yearly increases mean that even a reduced payout is likely to be equal or greater than the 100% payouts received by their grandparents in prior decades. Although the amount will be less in terms of real dollars, people will hopefully have enough savings to minimize the effects of the difference.

The Ever-Changing Numbers
Is the Social Security program really in danger? How much time is left? What would trigger it? The answer to those questions depends on which set of numbers you believe. The statistics most often cited by the media come from the "intermediate" estimate provided each year in the Social Security Trustees Report. That report also includes a "low" estimate, which calculates the fund's depletion date based on worse-than-expected economic conditions and a "high" estimate based on better-that expected conditions. Separate and distinct from these calculations, the Congressional Budget Office also makes its own projections with respect to the depletion date. The first rule of forecasting is that the forecast is wrong- it merely provided a general perspective on the anticipated scenario. None of the four estimates match each other. All of those estimates are subject to changing economic conditions. About the only thing they do agree on is that a depletion date will be reached at some time in the future if nothing is done to correct the situation.

The Fix
The fix appears simple. Raise taxes, lower benefits, or implement a combination of both options. It's been done before. In 1983, Ronald Reagan signed into law legislation that raised the eligibility age for receipt of full Social Security benefits for workers born in 1938. The legislation also imposed an income tax on up to half of the Social Security benefits paid to retirees whose adjusted gross income exceeds $25,000 for a single taxpayer and $32,000 for married taxpayers filing jointly. Taxes on the self-employed were also increased. Although such legislation is never popular, sometimes these changes are absolutely mandatory to ensure long term stability.

It will be done again. The Social Security Trustees noted in their 2009 report that "an immediate and permanent increase of 2.01% percentage points" in the payroll tax or 13.3% reduction in benefits would keep the program solvent for 75 years.

Privatization is another option, and one that was touted heavily prior to the stock market crash of 2008. After the lesson that the stock market can serve up 40% losses for a year, proponents of privatization have largely been quieted.

In The Meantime
While concerns about Social Security are an effective tool for galvanizing the elderly at election time, the troubles with the Social Security program are a distant threat on the far horizon when compared with the much more immediate concerns about the Medicare program. Spiraling health care costs and an aging population mean that the Medicare entitlement program is set to run out of money far sooner than the Social Security trust fund. In 2009, estimates pegged the date as 2017.

Healthcare reform is clearly a far greater concern than Social Security. After the political willpower is marshaled to address Medicare, Social Security may be the next item on the agenda. In the meantime, it is likely that politicians will continue to use the issue as a political football for years to come.

If you are overly concerned about the prospect of Social Security not being available to help fund your golden years, start today to plan your life so that you won't depend on the government to pay your bills in the future. Don't forget, the program was never intended to be your primary income source. It was always meant to be a supplement to your efforts. So save, invest and structure your finances so that you won't need the money. If it's there when you retire, count it as bonus and enjoy it. If it isn't you won't be worried about it. (Find out everything you need to know about this program and whether it will benefit you. See 4 Unusual Ways To Boost Social Security Benefits.)

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