Broker Check
Running on Empty

Running on Empty

| November 01, 2021

So, what happens when the Social Security trust funds run out of money? I’ve been getting several phone calls and emails from folks wanting to know if this is the end of Social Security benefits as we know it.

If you have paid into the system long enough to be receiving benefits, you have heard this warning before: We are approaching the point where the system is going to break! And yet, in spite of those previous warnings, we are still here, and the government is still sending out checks. So how are the checks still coming?

There are currently about 69 million people in the U.S. receiving Social Security benefits. And according to Forbes, for 40% of those recipients, it’s their only source of income. That means Social Security is not just important to you, it’s important to politicians who need your vote to get into or stay in office. That is why big cuts in benefits never seem to materialize.

According to the Social Security Administration’s website, payroll taxes are currently funding 78% of the benefits being paid. If nothing is done to make up that shortfall, the trust funds will deplete in the year 2034. Historically, policy makers have leaned on three primary mechanisms to keep the wheels from falling completely off. 

  • Increasing payroll taxes. Social Security is primarily funded by payroll taxes. Those taxes are collected from workers’ paychecks (typically paid evenly between employer and employee) on wages up to $142,800 in 2021. This number is called the taxable wage base and is indexed each year for inflation. Congress has the ability to increase this number and/or how it is calculated. There is also a plan currently being discussed to additionally tax wages over $400,000, which should significantly boost revenue for benefits.
  • Increasing full retirement age. 65 used to be the full retirement age, but for current retirees it is approaching 66 ½. This number is supposed to max out at age 67 for those born in 1960 or later, but Congress could extend those rules again if they so choose.
  • Increasing taxable income. If your adjusted gross income is high enough (and yours probably is), part of your SS can be taxed as ordinary income. This calculation currently tops out at 85% of your SS benefits being taxable. While there is not much more room here to raise additional tax revenue, don’t be surprised if this eventually gets adjusted as well.

One thing that has never happened - cutting existing benefits to existing recipients. If history repeats itself, we will see existing workers and those not yet retired making up the difference with one or a combination of the points above. No political party wants to be responsible for a current retiree not getting their check, especially if it represents the majority of their income. 

If you need help making the most of your income and benefits – let us help!