The Social Security Fund Shortfall: Understanding the Debate (Pt. 1)

Every presidential election cycle features debate about the future of Social Security.  The rhetoric predictably focuses on the program’s funding shortfall and the inability of the current political party in power to maintain continued payments in the future.

The simple truth, putting politics aside, is that a combination of extended life expectancies and reduced birth rates over the last several decades has impacted the original calculations that were used when the retirement income program was created in 1935.  Retirees and their financial advisors need to understand the challenges facing Social Security and the potential steps to address them so effective and appropriate plans can be implemented as soon as possible. 

The Facts

Social Security is a cornerstone of retirement income for millions of Americans.  The program is funded by payroll taxes collected from workers and contributions by employers.  These taxes are deposited into trust funds, which are then used to pay benefits.

However, we have an aging population with fewer workers supporting a growing number of retirees. Research from the American Enterprise Institute documents that there were 16 workers per Social Security beneficiary in 1950; that ratio will drop to just two workers per retired person in the coming decades.  The shift in U.S. demographics is straining the system.

A report from the Social Security and Medicare Board of Trustees finds that Social Security’s surplus reserves are expected to be depleted in 10 years and the current taxable income structure will be sufficient to pay only 77% of scheduled benefits.

“Projections from the Congressional Budget Office and private researchers show clearly that, if no action is taken, the key trust fund used to support the payment of (Social Security) benefits will run dry by 2033 or 2034 — meaning promised benefits could then drop by 25% or more,” reports ThinkAdvisor on April 7, 2024.

The Debate

There is no “one size fits all” answer to fixing the Social Security shortfall, but there are a number of proposed solutions currently being considered by serious-minded researchers and retirement income experts.  Please find below four of the most common options under discussion and their respective counter-arguments:

1. Raise payroll taxes

This idea would increase the amount that workers and employers pay into the system.  While simple and effective, it likely places a strain on individual finances, especially for younger workers.

2. Lift the tax cap

Currently, only income up to a certain amount is subject to Social Security taxes.  Lifting this cap would bring in more revenue, but it would primarily affect higher earners and may not be a popular solution.

3. Increasing the retirement age

A Forbes column in March 2024 argues that gradually raising the age at which people can receive full Social Security benefits would decrease the program’s payouts.  However, such a modification could hurt those who planned to retire earlier and may not be in good health at a later retirement age.

4. Changing benefit formulas

Altering the way that benefits are calculated could reduce payouts for future retirees.  The recalculation, though, could disproportionately impact lower-income retirees who rely more heavily on Social Security.

The Need to Understand

It is important for retirees and their financial advisors to ignore the emotionally charged commentary surrounding the Social Security Fund crisis and focus on the facts.  On one hand, the projected shortfall in the trust fund is not immediate, so there is no reason to panic.  On the other hand, if the problem is left unaddressed, benefit cuts could occur in the future, impacting budgets and relied upon programming immediately. 

Moreover, this ongoing debate can create uncertainty in the minds of retirees and their advisors.  Keep updated on the latest developments by following reliable sources, such as the Social Security Administration's website or AARP’s news reports.

Regardless, seniors need to have a diversified retirement funding plan.  The current unsettling status of the Social Security fund underscores the reality that those monthly government checks should not be the sole source of income.

Up Next

In our next article, we will continue our explanation of the Social Security Fund shortfall by encouraging seniors and their financial advisors to reimagine financial security and think differently about guaranteed income streams.  One concept we will explore is a creative option for generating additional retirement income through a transaction called a life settlement.  A life settlement is a proven strategy for generating revenue from an unwanted, unneeded, or unaffordable life insurance policy.  With a life settlement, a senior sells his or her life insurance policy to a licensed third-party entity for a cash payment. The entity assumes all payments of the premiums and collects the death benefit when the insured passes away.

The best way to ensure that a retiree is receiving a fair market price for his or her life insurance policy is to work with an experienced life settlement broker who is obligated, per applicable law, to act in the best interests of the policy owner throughout the transactional process.

For more information on Welcome Funds, life settlements, and to receive a free, no-obligation life insurance policy appraisal, please call 1-877-227-4484 or visit www.welcomefunds.com