As most retirees and soon-to-retirees already know, Social Security is slated to run out of money in 2034 and, unless changes are made between now and then, beneficiaries beginning in that year will receive only 79% of what they otherwise would be owed.
But how likely is it that our politicians would actually let this come to pass? Social Security is widely assumed to be the “third rail” of politics, zapping politicians who dare to tinker with it. If so, then we need not worry about the subject of a recent column: What Social Security “running out of money” would mean for our retirement planning.
To be sure, predicting what will come out of Congress in the next few months is an inexact science at best, much less the next 15 years. But if anyone can gauge Social Security’s real-world prospects, it should be Andy Landis, author of “Social Security: The Inside Story”. Landis, for those of you who don’t know him, is a former Social Security Administration representative who has several decades of experience explaining the intricacies of Social Security to retirees and soon-to-be-retirees.
In my interview with him, Landis started by reviewing the amendments to Social Security that were enacted in 1983, which is the last time that changes were enacted. He pointed out that the Social Security trust fund was slated to run out of money in July of that year, and the changes that averted that possibility weren’t enacted until March—with just four months to spare, in other words. Landis characterized the changes as “gentle, phased in, and targeted in the future.” They included the gradual increase in the full retirement age and an acceleration of a previously-enacted payroll tax increase; in addition, up to one-half of the value of Social Security benefits were made potentially taxable.
With those changes, the Social Security system immediately began to run a sizable yearly surplus. The projection at that time was that the changes would postpone when Social Security would run out of money until the mid-2030s.
Landis emphasized, therefore, that there’s nothing new or surprising in the Social security system’s current projection that it will run out of money in 2034. That’s almost precisely what the actuaries were projecting more than 30 years ago. There’s no more of a Social Security funding crisis now than what was envisioned then after the 1983 changes were enacted.
What lessons can we learn from this experience? One is that we shouldn’t be surprised if our politicians will wait until the last minute to make necessary changes to the Social Security system. If so, then we probably should assume that Social Security’s current payout rules will stay largely or completely in place for the next 15 years.
The other lesson, according to Landis: Changes, when they eventually do get enacted, are likely to be incremental rather than drastic. That’s because draconian changes are not necessary in order to keep Social Security solvent.
In fact, minor changes can have a large impact. Consider, by way of illustration, the financial impact of reducing the annual cost of living adjustment by 1 percentage point over what it would be each year: The Social Security Administration estimates that this would extend by 10 years the point at which Social Security runs out of money.
To put such a COLA modification into perspective, consider that the average monthly Social Security benefit is $1,404. The COLA for next year is 2.8%, which would otherwise increase this monthly payment by $39. A reduction of that COLA by 1 percentage point would reduce the monthly increase to $25, or $14 less.
(Let me hasten to say that, in providing this illustration, I am not recommending that this change be made. I am not taking a position on that. I am just using it to illustrate the magnitude of what could add 10 years to the solvency of the Social Security trust fund.)
The bottom line, according to Landis: The doom and gloomers notwithstanding, the Social Security system is not in crisis. Changes eventually will have to be made, but we’ve known that for decades.
Read: People who saved for retirement are being punished by Social Security taxes
Landis also took issue with those who argue that, far from the Social Security system running out of money in 2034, it is broke now. Those who make that argument point out that the much-vaunted Social Security trust fund of nearly $3 trillion doesn’t really exist—the money was deposited with the U.S. Treasury where it was long ago spent.
Landis responds that “of course” the Social Security Administration deposited its surplus with the U.S. Treasury, since it is required by law to purchase U.S. Treasury bonds with its surplus. And “of course” the U.S. Treasury has spent the proceeds of the bonds it sold.
But the same could be said of any bond. When you purchase a bond from a company, for example, it’s with the full expectation that the firm will use those proceeds rather than stuff them in a mattress. Landis therefore made the following offer to those who insist that the U.S. Treasury bonds purchased by the Social Security Administration are worthless: He would be happy to take off their hands the allegedly “worthless” government bonds that they own.
If you decline his offer, then you by extension have to concede that the Social Security trust fund is not empty.
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