On August 31st, the Trustees of the Social Security System released their mandated annual report to Congress on the actuarial status and financial operations of the retirement and disability income trust funds, the Medicare Hospitalization Fund (Part A), and the Medicare Supplemental Medical Insurance Fund (Parts B & D). This year’s report was the 81st since the enactment of the Social Security Act (1935), and the first since the start of the Covid-19 pandemic. Not surprisingly, the solvency term, known as the “reserve depletion date,” of the existing retirement and disability income trust funds was reduced by one year, from 2035 to 2034, owing principally to the effects of the pandemic (accelerated mortality coupled with lower birth rates) and the brief recession (lower worker productivity resulting in a 1% decline in GDP) that followed. The report continues to provide a stark reminder that one’s future financial well-being in retirement is a self-driven process.

At the end of 2020, 65 million individuals were receiving some form of benefit from these trust funds, with the largest class of recipients representing retired workers, dependents of retired workers, and survivors of retired workers. In 2020, the total program cost was $1,107 billion. Approximately 175 million workers contributed payroll taxes to the Social Security Trust Fund during 2020. Worker and employer-matching contributions accounted for 90% of trust fund annual income; income taxes on Social Security Beneficiary recipients represented 3.6% of annual income, and interest income from U. S Treasury investments provided the balance of income, for a total income of $1,118 billion. Social Security Retirement and Disability Income Trust Funds are projected to operate at a deficit for 2021 and annually thereafter to at least 2030. As has been previously reported many times, the number of retirement income beneficiaries (the “baby boomer” generation) has been increasing at a significantly higher rate than the number of young workers entering the workforce, due to lower birth rates from several decades earlier. By 2035, under current projections and assumptions, the Social Security Retirement Trust Fund will be able to only pay between 74% and 78% of retiree benefits.

According to the Center on Budget and Policy Priorities, one-half of current retirees receive 50% of their retirement income from Social Security Retirement Benefits. For twenty-five percent of current retirees, Social Security Retirement Benefits constitute 90% of retirement income. Keep in mind that the earliest one may claim Social Security Retirement Benefits, in a permanently reduced benefit of up to 30%, is age 62. Approximately 22% of men and 25% of women apply for benefits at age 62. The age to collect Full Retirement Benefits has been increasing in two-month stages annually from age 65 to age 67, for those born subsequent to 1942. Claiming Social Security may be deferred from Full Retirement Age until age 70, with an 8% annual benefit supplement.

These projections present a particularly sobering picture for anyone born in 1968 or later, i.e. those hitting retirement in 2035. For example, if a 53-year-old individual today has a projected monthly Social Security Retirement Benefit of $1,000, and this sum represents 50% of projected retirement income at age 67 (starting in 2035), Social Security may be able to only pay a monthly benefit of $750, resulting in a permanent decline in total projected monthly retirement income of 12.5%. For individuals whose Social Security benefits represent 90% of total retirement income, total retirement income could decline by up to 22.5% annually.

How has Congress dealt with the imbalance of increasing benefit retirees to a lower current work base? The Social Security payroll tax rate imposed on employees and employers in 1937 was 1% of the first $3,000 in taxable wages and has increased over time to the present rate of 6.2%, which was implemented in 1990, on wages of $142,800 in 2021. During The Great Recession, there was a brief “payroll tax holiday” reduction to 4.2% in the Social Security payroll tax for calendar years 2011 & 2012. In 1983, the Social Security Full Retirement Age was increased from age 65, for individuals born prior to 1943, to age 67, for those born in 1960 or later. In 1984, 50% of Social Security Benefits became income taxable depending upon the combination of a recipient’s adjusted gross income, tax-exempt income, Railroad Retirement income plus 50% of Social Security, as compared against a threshold of $25,000 for single taxpayers and $32,000 for those married filing jointly. A second, higher, threshold was introduced in 1993 triggering the inclusion of 85% of Social Security Benefits in taxable income. Last, on April 30, 2016, Social Security claiming strategies were curtailed for married couples born after 1954 through the elimination of “File and Suspend” and “Claim Now and Claim More Later” approaches employed by dual employment income couples.

It’s clear that Congress will have to act once again, in the not-too-distant future, to “shore-up” the Social Security Retirement Trust Fund and the Medicare Hospitalization Fund. While no specific proposals have been offered in response to this year’s Trustees’ report, one or more prior actions of Congress will likely be updated and expanded.

There has been much publicity over the fact that the onus for funding one’s retirement has been shifting for decades in the corporate world from employer to employee. The significance of this ongoing transition cannot be minimized, and is actually exacerbated, by the projected looming insolvency of the Social Security Retirement Trust Fund. In addition, average life expectancies over this same time period have been increasing. In fact, the Uniform Lifetime Table used to compute retirement account owner Required Minimum Distributions (RMDs), has been revised for the first time since 2002 and will take effect on January 1, 2022.

Increasing life expectancies coupled with reduced Social Security Retirement Benefits provide a stark reminder that one’s future financial well-being in retirement is a self-driven process. Funding retirement arrangements at an early age and consistently thereafter allows the power of compounding to do much of the “heavy lifting” in preparing one for a comfortable retirement.

Many of our clients look to Eagle Ridge investment and wealth management professionals for ongoing guidance in planning, funding, strategizing, and spending from their available financial resources on a tax-efficient basis in retirement. While the above information is provided for general information purposes, a competent legal and tax accounting review is highly recommended before taking any specific action.