Dave Mello

Horizon Retirement Advisors, LLC

Dave Mello picture


I know that is a broad and concerning statement intended to cause the reader to investigate further. The new research report from Boston College’s Center for Retirement Research provides us with fresh and actionable information.

If current spending, without tax adjustment, continues in 2034, benefits will need to be reduced by 25%. An increase of 2.66% in payroll social security taxation will need to be implemented to solve the problem. Otherwise, in 2034, benefit adjustments will become necessary.

The current actual cost per payroll is about 17%, and an increase would push the taxation to 20%. Depending on your employment situation, either you are currently paying the entire amount (self-employed) or sharing it with your employer (50/50). However, the tax is being paid, and it will need to be increased.

In 1983, when Congress authorized the National Commission on Social Security Reform, many early estimated the trust fund to run out of money as early as the late 1990s. Of course, that didn’t happen, and the reason is simple; wages increased more significantly than the percentage of retiree’s income paid by Social Security. More taxation paid into the trust fund has allowed the date of exhaustion to be moved farther.

The possibility that 2034 may not be an accurate estimate; one factor would be a worsening economy. If the economy fell into a recession (or depression), the trust fund estimates would be adjusted.

The other more possible option would come from the political side; a presidential administration could push for larger and broader benefits, stretching the trust fund even thinner. Expanding benefits is unlikely since it would directly collide with increased taxation, which all politicians wish to avoid.

To put things into perspective, our economy is vast and growing. The full benefit of all aspects of the Social Security program equals only 1% of our national Gross Domestic Product (GDP). Based on that small percentage, the future seems brighter than it has been in a long time. By dealing with the deficit issue now, the long-term problem of Social Security funding is manageable.

Here is the link to the Boston College report: http://crr.bc.edu/briefs/social-securitys-financial-outlook-the-2016-update-in-perspective/

Sign up for our newsletter.

Safe Money insights and tips sent to your inbox twice a month.

Sign Up Now!