Social InSecurity?

It often seems that everywhere you look, you’re confronted by headlines about the impending “collapse” of Social Security. There is often so much negative information presented, it’s hard to fully understand the reality of the situation. We’re here to help.

Social Security “Bankruptcy”

 One of the most frequently cited Social Security statistics is that it’s projected to “run out of money” in 2037. Phrased this way, it sounds like the whole system will go kaput then, with no one receiving a Social Security check again afterwards.

However, what “run out of money” actually means is that the Social Security Trust Fund is projected to be depleted. Currently, money coming into the Social Security system in the form of payroll taxes isn’t sufficient to cover benefits being paid out. The Trust Fund is used to cover the shortfall so everyone receives all of their benefits owed.

If the Trust Fund runs out of money in 2037, those funds won’t be available to “top off” payroll taxes; this does not mean that there will be no money left to pay any benefits. According to the most recent Social Security Trustees report, in 2037, after the Trust Fund is depleted, payroll taxes would be sufficient to pay out around 79% of benefits. This means, if nothing is done to fix the system, in 2037 your benefit of $1,000 per month would be $790 instead; this isn’t great, but it’s a far cry from your benefit disappearing entirely.

Funding Crisis 2.0

Many people also don’t realize this isn’t the first time Social Security has been headed towards insolvency. In the late 1970s and early 1980s, the Social Security Trust Fund was also in dire straits. In 1977, the trust fund balance stood at nearly $32.5 billion; by 1983, it had been drawn down to under $20 billion, a drop of nearly 40%. In fact, it was predicted to be fully depleted in less than two years.

Because of the political motivation being that close to the brink of insolvency provides, there were major bipartisan reforms passed in 1977 and 1983 to improve the long term stability of the system. Some of the fixes were gradually increasing the full retirement age from 65 to 67, slightly increasing payroll taxes, taxing Social Security benefits as income, and slightly increasing the payroll tax rate for self-employed workers.

Today, we’re still many years away from being that close to full-on depletion of the trust fund. At the end of 2016, the trust fund balance stood at $2.8 trillion; looking back to 2010, the trust fund held $2.4 trillion, an increase of nearly 17% in value.

This means that, while most of what you read about is the looming depletion of the trusts fund, we are still in a period where the fund is growing.

The Bottom Line

 This isn’t to say everything is fine with Social Security; the trust fund will run out of money if nothing is done. There are many possible reforms out there that would get the system back into long-term solvency: increasing the taxable wage base, increasing the payroll tax rate, further increasing full retirement age, and more. These reforms, however, require Congressional action.

In today’s highly polarized political environment it seems impossible for any changes to actually be made, but look back to the previous crisis for an example: things needed to get down to the wire before it was politically viable to make changes to the system.


Mark Durrenberger, CFP®, ChFC®, EA is a Senior Advisor at BDF.  Mark has been in the financial industry since 2010 and received both his Master’s and Bachelor’s degrees from Northwestern University.