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June 21, 2013 at 08:16 AM
It happens every year, just like the State of the Union address. The board of trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds sends an update on how things are going to the president and Congress. This year’s report, released on May 31, is not exactly considered “light” reading at a hefty 254 pages. It is the 73rd such document created by an ever-changing board of trustees.
The release of this document is always a newsworthy event. Each year, it provides fresh insight into two of the most important government programs in existence in the United States. Statistical evidence in this report for year-end 2012 confirms that:
1. Social Security benefit payments are made to about 57 million people — 40 million retired workers and their dependents, 6 million survivors of deceased workers, and 11 million disabled workers and dependents of disabled workers.
2. Approximately 161 million people paid taxes into the Social Security system.
3. The Social Security system paid out $786 billion to covered workers.
To put things in perspective about the importance of this program, the number of people who voted for either President Obama or former Gov. Mitt Romney in 2012 is about equal to the number of people who pay taxes into the Social Security system.
The trustees’ report states that the system now pays out more in benefits than it receives from the combination of the FICA taxes and interest on its investments. The trustees project that the combined Retirement and Disability Trust Fund will be exhausted by 2033. By the way, the trustees’ report for 2011 reported the same thing.
Doom and gloom? Is 2033 the end of the road for all the people paying into the system? Do advisors just tell their clients to take as much as they can from the system now, since it will all be gone by 2033?
Fortunately, the trustees’ report also offers a little good news! A very important quote from page four of the report states, “At the time of reserve depletion, continuing income to the combined trust funds would be sufficient to pay 77 percent of scheduled benefits.”
Look at this from a different perspective. If nothing is done to fix the system, it will not be gone, but people will have to take 23 percent less in benefits. The good news is that there are many ways to fund the shortfall. Some of the ideas under consideration include increasing the full retirement age, increasing the FICA wage base, increasing the Social Security tax rate and/or reducing the payments by means-testing. Clearly, some combination of each will fix the problem and provide benefits for the next 75 years.
