By: Chip and Jamie Hunt

Social Security: A Crisis? Sure. A Catastrophe? Not So Fast.

Social Security has long been the subject of countless headlines, op-eds, and heated debates –  and with the release of the this year’s edition of the annual social security trustees report – the debate is rekindled; all of which seem to suggest that it’s on the brink of total collapse. But before we all start planning our retirement around backyard vegetable gardens and barter systems, let’s take a closer look at what’s really going on—and why it might not be as dire as it sounds.

The Evolution of Social Security: From Simple to Complex

Let’s start with a little history (don’t worry, I’ll keep it short). Social Security was originally rolled out in 1935 to give retirees a little financial security in their golden years. Back then, it was a simple system: work, retire at 65, and collect your benefits. But, like all good government programs, it expanded. By 1939, benefits were extended to spouses and minor children, and by the 1950s, disability insurance portion of benefits was added into the mix.

Today, Social Security is a lifeline not just for retirees, but for disabled workers, survivors, and even young children of deceased workers. It’s a broad and complex system offering an array of benefit coverages, which is great—until you start trying to balance the books.

It’s important to understand that Social Security includes two benefit programs: the retirement benefits portion and the disability benefits portion. Separate sets of books are maintained to account for each portion. For our purposes, I am only addressing the retirement benefits portion.

The Current Situation: Some Challenges, but Plenty of Solutions

The latest Social Security Trustees report does sound some alarms. It predicts that by 2033, the retirement benefits portion of the Social Security Trust Fund could be depleted. But before you start packing for the apocalypse, let’s put this into perspective. Even if the Trust Fund were to run dry, Social Security will not disappear. In such case, the system would continue to pay out benefits—just at a reduced rate, estimated at about 80% of promised benefits. That’s because although the funds may be depleted, sufficient funds continue to flow in to pay the estimated 80%.

But here’s the thing: the 20% cut is NOT a foregone conclusion!

In fact, there are plenty of solutions on the table that could help shore up Social Security’s finances long before that 20% cut could become a reality.

A Balanced Approach to Securing Social Security’s Future

So, what can be done to avoid drastic benefit cuts? The good news is, – and we have some precedents to guide our views – there are several options, and it’s more likely that Congress will employ a combination of these to spread the burden and make the changes more palatable.

1. Gradual Increases in Retirement Age: Just as we saw with the adjustments in the 1980s, a slow increase in the full retirement age (FRA) could help extend the life of Social Security. This approach would likely phase in changes over time, allowing those close to retirement to stick to their original plans.
   
2. Revised Cost-of-Living Adjustments (COLA): Another potential fix involves tweaking the COLA calculations. By reducing the rate at which benefits grow over time, the system could save money without directly cutting current benefit levels.
   
3. Increasing the Social Security Taxable Wage Base: Right now, only wages up to $160,200 are subject to Social Security taxes. Raising this cap would mean that higher earners contribute more to the system, which could significantly boost revenues.
   
4. Small Increases in Payroll Taxes: While no one loves the idea of paying more taxes, a modest increase—say, about 1.70% for both employees and employers—could make a big difference over time, particularly if implemented gradually.
   
5. Cutting Out Esoteric Claiming Strategies: By eliminating some of the more obscure and complex ways to claim benefits, the system could become more efficient, reducing unnecessary payouts and ensuring that funds go where they’re most needed.

The Bottom Line: Social Security Isn’t Going Anywhere

Let’s be clear: Social Security is not on the verge of disappearing. Even in the worst-case scenario where no changes are made (a scenario that seems highly unlikely), beneficiaries would still receive about 80% of their expected benefits. But with some relatively modest adjustments, it’s entirely possible to secure the system’s future without resorting to drastic cuts.

So, what should you do? For starters, tune out the fear-mongering rhetoric. The media loves a good crisis, but the truth is often far less dramatic. Yes, Social Security faces challenges, but those challenges are not insurmountable. By planning for a slightly lower benefit in your retirement projections and staying informed about potential legislative changes, you can prepare for whatever the future holds.

In the meantime, enjoy the peace of mind that comes with knowing that Social Security is still running—and with a few tweaks here and there, it’s likely to keep running for a long time to come. Just don’t let anyone convince you that it’s about to drive off a cliff.

This article is provided for informational purposes only. It is always best to counsel with your financial advisor or your tax professional to ensure that you make the best decision for your circumstances.