Mary and Will A. from Oxford, MS ask: Hello Mitch, we hope you’re enjoying a nice Spring. My husband and I saw an article recently that said the Social Security program could be running out of money soon. That has us very worried as our goal is to retire next year. Is there truth to this article and if so, what does that mean for our benefit payments in retirement? Thank you.
Mitch’s Response:
Thanks for writing, Mary and Will, and I hope you are having a colorful spring season as well.
In short, I do not think you need to worry about all about whether you will receive your full Social Security Retirement Benefits.
The articles that ran last week highlighted the prospect of Social Security trust funds running out in the next decade.1 At current levels of payouts vs. revenues, this is true. But the important thing to understand here is that Social Security is a pay-as-you-go-system—it is not purely funded by the trust fund in question. Tax revenue is the primary source of financing for benefits, and as long as the U.S. economy continues to grow and businesses and individuals continue to pay taxes—two outcomes I would not bet against—then the Social Security program will pay benefits.
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The Social Security trust fund is tapped when the program’s benefits (which include disability in addition to Social Security retirement benefits) outweigh its income from payroll taxes and other sources. Since 2021, Social Security benefits have outweighed tax revenue for the program, which has put the trust fund on a depletion path. In the 1980s, ‘90s, and early 2000s, Social Security ran a ‘surplus’ that accumulated in the trust fund, which is invested in U.S. Treasury bonds. But in 2023, the balance of Social Security trust funds fell by -$41 billion.
Looking ahead, the solutions for keeping the Social Security program afloat are pretty straightforward. Congress could pass a law that allows the U.S. Treasury to pull funds from other revenues and sources to finance Social Security, which would enable the program to continue paying benefits as normal without raising taxes. Congress could also raise payroll taxes to generate additional revenue for the program.
But the idea that Congress would make structural changes to the Social Security program that lowered benefits would be so unpopular politically that it seems highly unlikely that any political party would rally behind the idea. I really don’t see any possibility that this would be the next step.
One final thought to put forward on this topic is that the possibility of Social Security trust funds running out means retirees should claim benefits early in retirement, to mitigate the risk of seeing benefits get cut. Generally speaking, I disagree—it often makes sense to wait as long as possible to claim Social Security benefits, to maximize the dollar amount of lifetime benefits. For investors with adequate retirement savings, I still think this is a good idea.
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Disclosure