Despite Scary Headlines, No Big Changes to Social Security’s Outlook

Every year the Trustees of the US Social Security and Medicare trust funds provide their report on the current and projected financial status of these programs. Gail Buckner, CFP, our personal retirement and financial planning strategist, takes a look at this year’s scorecard from the Trustees. She says media headlines or political rhetoric suggesting Social Security is near death are greatly exaggerated.

Imagine going to your doctor for your annual check-up. After running some routine tests, he or she tells you that you have a relatively insignificant infection that will have absolutely no impact on your health for the next 16 years. While your disease will never kill you, if you don’t make some healthy changes in your lifestyle, it will limit your activities a bit.

Your first reaction might be, “Oh, no! I’ve come down with the same disease my grandfather had!”

But then you might realize, “Wait a minute. I’ve got 16 years before I feel any effect from this. More importantly, I can completely prevent this disease by slightly altering my diet and increasing the exercise I get. Whew!”

That’s essentially the situation that Social Security is in.

The 2017 Trustees Report

By law, every year the Social Security Trustees present Congress with a report on the outlook for the program’s financing, both near term as well as 75 years into the future. This entails making assumptions and projections about dozens of factors—some of which might surprise you.

Such as: What will be the birth rate in each of the next 75 years? How fast will wages grow in each of the next 75 years? How many people will qualify for disability benefits in each of the next 75 years? How many people will be employed in each of the next 75 years? What will be the legal immigration rate in each of the next 75 years? What will interest rates be in each of the next 75 years? Etc., etc.

In other words, the outlook for Social Security’s funding is based upon educated guesstimates. In the words of the great sage Yogi Berra, “It’s tough to make predictions. Especially about the future.”

It doesn’t help that the long-term solvency of Social Security is expressed in terms used by insurance professionals. (Although this should not be surprising as Social Security is social insurance.)

The problem is that most of us are not actuaries! So when you hear, “The Trustees project that the combined trust funds will be in depleted in 2034” and that “the actuarial deficit … is 2.83% of taxable payroll, up from 2.66% projected in last year’s report,” you tend to focus on the words you are familiar with: “depleted,” “deficit” and “up.”

This leads to the conclusion that the program will run out of money in 17 years. Those close to retirement age might also conclude, “I’m filing for benefits as soon as possible so that I can at least get something back before Social Security goes broke!”

Take a Deeeep Breath

To paraphrase Mark Twain, another great American philosopher, “Reports of [Social Security’s] death are greatly exaggerated.”

Consider this: Will Americans (generally speaking) still have jobs in 2034 and beyond? Of course! Which means that employers will still be required to deduct payroll tax and send it to the Treasury Department which will then credit Social Security’s account. So what does “actuarial deficit” refer to?

In a nutshell, it’s the size of the shortfall—the difference between the Social Security tax being collected and the amount of benefits the program expects to have to pay out. In other words, it’s how much the current Social Security tax rate of 12.4% would have to be increased in order to pay all retirees their expected benefits through 2092:

Current Tax Rate: 12.40%
+Actuarial Deficit: +2.83%


But let’s break this down a little further. The payroll tax is split, with employer and employee each contributing half, for a current contribution of 6.2%. The additional 2.83% (the deficit) would also be evenly divided, with employer and employees paying 1.4% more.