Personal Finance

Social Security: Not in Peril

Is Social Security going bust? As the program turns 75 this year, that's a valid question. A lot of people fear that they can't expect benefits in the future. Not to worry: The system's solvency problems aren't that bad, and Congress can enact some easy fixes to ensure its ongoing stability.

Back on Jan. 31, 1940, the first Social Security retirement check went out in the mail to Ida May Fuller , a legal secretary from Vermont who attended grammar school with Calvin Coolidge. Today it is a key part of retirement income. Roughly two-thirds of elderly beneficiaries rely on Social Security for more than half of their income and 24% count on the system for all of it.

Many Americans are convinced that that the Social Security program is in peril. Some 67% of respondents to a CNN poll believe Social Security is in crisis. Young and mid-career professionals often do not want to count on this income stream as part of their retirement plan, and recent retirees are often ready to claim benefits as soon as possible so they can get their share before the program is insolvent.

Advancements in medical science have done no favors for the health of the Social Security program. Today, men who reach age 65 have an average remaining life expectancy of 17.6 years and women can expect another 20.3 years. These life expectancies compare to 12.3 (men) and 14.7 (women) in 1940 when Ida May Fuller received that first check.

When it comes to Social Security, many Americans reaching eligibility age tend to treat the system as a game of musical chairs where they need to find a chair before the music stops. Data indicate that more than 50% of beneficiaries claim their benefits as early as possible (age 62), when they get lower benefits than if they waited until 66, known as full retirement age.

No, Social Security is not about to run out of money anytime soon. Recipients get paid from payroll taxes and interest from assets in the system's trust fund. According to the Social Security Trustees Report :

  • The Social Security trust fund, in the most recent year, had a surplus of $32 billion with $855 billion of revenue and expenditures of $823 billion.
  • There has been a surplus in the program every year since 1982 , the last time Congress revamped Social Security by hiking payroll taxes and increasing future eligibility ages. Revenues should continue exceeding costs until 2020.
  • The trust fund will be depleted in 2033. However, this simply means that there will be a shortfall between what the system collects and what it pays that the Social Security Trust Fund cannot cover. Even if Washington does nothing to change or fix the program, the Social Security system will still be able to pay out 75% of benefits from incoming cash flow through 2088.

Former Federal Reserve Chairman Alan Greenspan once said, "If you get the right people in the room, you can solve Social Security in 15 minutes, and the first seven minutes are pleasantries."

Consider the possible solutions, none of which is mutually exclusive:

  • Increase payroll taxes. Workers currently pay 6.2% of employment income to Social Security taxes. Raising the tax from 6.2% to 7.6% would secure the program in its current state for another 75 years.
  • Eliminate the cap on Social Security earnings. In 2015, the 6.2% tax only applies to the first $118,500 of employment income. Congress could increase this limit or remove it to provide more revenue for the program.
  • Increase retirement age. Gradually raising it to 70 would eliminate a third of the long-range shortfall .
  • Reduce automatic inflation adjustments to benefits . Congress could trim the cost of living adjustments, for instance, by using a chained-CPI measure that grows more slowly. With this approach, statisticians calculate the Consumer Price Index (which the system uses to make the adjustments) using a formula that factors in how people might substitute a cheaper replacement if an item's price rises.
  • Means test beneficiaries. This way, benefits get reduced for individuals with other income sources. Folks who rely on Social Security for their entire income would not suffer; those with a lot of money in the bank would get less.

Fortunately, overhauling the program is politically feasible. The National Academy of Social Insurance annually conducts an extensive survey to gauge public sentiment about various potential changes to Social Security.

Each year, the results demonstrate that Americans dramatically favor addressing the funding side of the program (increasing payroll taxes or eliminating the earnings cap) over changing the benefits equation (cutting Social Security benefits). Nearly 80% were willing to pay more in taxes to secure the health of the program.

That, in itself, shows it's entirely possible to make any changes needed to shore up the system. And that's good news.

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Jason Lina, CFA, CFP,isLead Advisor at Resource Planning Group Ltd. in Atlanta. Website:

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.