Due to the large, and growing, federal debt we often hear from elected officials that the debt cannot be brought under control without entitlement reform. Included in entitlement reform discussions is Social Security. Knowing that workers, and their employers, pay into Social Security most people wonder why Social Security can be called an ‘entitlement’ when it is currently a fully funded system.

This issue is made even more confusing, and in my opinion – misleading, when you look at websites such as the Center on Budget and Policy Priorities that says:

“Last year, 24 percent of the budget, or $888 billion, paid for Social Security, which provided monthly retirement benefits averaging $1,342 to 40 million retired workers in December 2015. Social Security also provided benefits to 2.3 million spouses and children of retired workers, 6.1 million surviving children and spouses of deceased workers, and 10.8 million disabled workers and their eligible dependents in December 2015.”

No mention is made that Social Security withholding, employer contributions, and interest on the trust fund fully paid for these benefits, as well as added to the trust fund balance. Because it is currently fully funded, and will be through about 2037, I think it would be more constructive to look at Social Security separately from the rest of the federal budget.

After the trust fund is depleted in 2037, due to increasing benefits as the Baby Boomer generation becomes fully retired, part of the promised benefits become an “entitlement.” The Social Security trustees report from 2016 states that once the trust fund is depleted there will only be sufficient money coming into the system to pay about 78% of promised benefits. Because the federal government is obligated under currently law to pay these benefits, the amount not funded becomes an ‘unfunded liability’. Stated another way, the 22% of promised benefits not covered by tax withholding and employer contributions becomes an entitlement.

The size of the unfunded liability, when looked at in raw dollar terms is very large: $23.1 trillion is the Social Security trustees estimate of the “unfunded obligation through the infinite horizon”. The unfunded liability through 2087, 75 years from now, also seems large at $9.6 trillion. The problem appears more manageable when put in context of the expected percentage of U.S. Gross Domestic Product. During the same period the unfunded liability is only 1.4% of GDP, or 4% of projected taxable payroll.

The estimates above are based on making no changes to the current system. The best proposal I have seen so far to ‘fix’ Social Security so that an unfunded liability doesn’t develop is from the Commission on Retirement Security and Personal Savings Bipartisan Policy Center. The commission outlines twelve changes they believe will restore solvency to the system. The changes recommended include modest tax increases, increasing retirement age, and minor changes to the formulas used to calculate benefits. You can read the entire report, available on the Social Security website.

Most of the changes outlined do to not kick in until 2022, resulting in little change for those retiring now. We feel that Social Security will be available moving forward for all covered workers provided congress finally stops kicking the can down the road. We would be happy to provide an analysis of your personal Social Security situation so you will know what to expect and to see how Social Security fits into your overall retirement plan. 

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