Will Social Security be around in 2050?

Social Security Funding

 For many people, social security is the cornerstone of their retirement plan. Most Americans know that paying into the program during their working years will provide them with much needed flexibility and income when they are ready to retire. But is the social security program under threat? Will it still be around in 30 years? How about 40 years? When working on financial plans for clients, I often get asked “should I count on social security” decades from now? The answer is complex, but luckily many of the claims that social security will “run out of money” are bit premature. The program may not look the same in the future, but I don’t think the situation is as dire as many predict. You can probably count on social security being around in 30 years, but you might have to plan for less benefits than you anticipated.

 The Social Security Board of Trustees 2021 report seems to contradict what I said above. The Old Age and Survivors Trust Fund (OASI), which is the main source of benefits for the program is expected to run out of funding by 2033, one year earlier than projected in the 2020 report. Of course, this caused a stir in the financial media, with many journalists signaling that young people in the U.S. will never receive social security benefits. The other main source of funds is The Disability Insurance (DI) Trust Fund, which pays disability benefits. The 2021 report expects the DI fund will be able to pay benefits only until 2057, eight years earlier than the 2020 report.

 This sounds like a nightmare scenario, so why are many financial planners not too concerned about the stability of the social security program? Because most social security benefits are paid annual by payroll taxes, not by the trust funds. Ben Carson from the Wealth of Common Sense blog had a great article this week explaining why the situation isn’t as catastrophic as being presented in the financial media.

Payroll tax funding of social security

In 2033, when the OASI is expected to be depleted, payroll taxes will still be able to fund 76% of social security benefits. In 2057, when the DI trust fund is depleted, payroll taxes are projected to fund about 91% of disability benefits. As baby boomers retire, there will be less people paying into the social security system, but there will still be large generations (like Gen Z) that are entering the workforce. By 2035, there will only be about 2.3 workers per retiree paying into the system, compared to around 3.2 workers per retiree from 1974-2008. While this isn’t optimal, there will still be a significant source of funding for social security benefits, even if the program must be modified over the coming decades.

The future of social security

What does this all of this mean for the future of social security? Can young people still count on receiving benefits for a program they have to pay into during their working lives? Young people will be able to count on receiving *some* benefits, likely between 70-90% of current social security benefits. The government is likely going to cut benefits in the future to ensure the integrity of the program and allow for payroll taxes to completely fund future benefits. Other potential options to bolster the program include pushing back “full retirement age” to beyond 67, raising the social security wage base, or modifying cost of living adjustments. However, even more likely is that funds will be re-allocated from other government resources to keep benefits stable. In fact, the 2021 report ran projections all the way until 2095. Based on current demographic trends, the results showed that 74% of social security benefits would be covered by payroll taxes through 2095. Social security might not look the same decades from now, but young people will certainly have some benefits to help fund their retirement.