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Is Social Security Going To Go Bankrupt?

The short answer is NO!

This issue has been around for many years and seems to have resurfaced recently as we get closer to 2034.

The definition of bankruptcy is the inability to pay outstanding debts or obligations. The key word here is inability.

The Social Security program, as designed, has become antiquated and is being asked to do something it was simply not designed to do.

When Social Security started in 1935 there were approximately 45 workers to every 1 beneficiary.

That number has steadily fallen over the past 88 years.

The growth in beneficiaries due to living longer and reduced contributing workers due to people having fewer children has brought the current number of workers to beneficiaries to 3 to 1.

Current studies project that the system can operate as-is at a 3 to 1 ratio.

By 2034, the ratio is expected to be 2 to 1.

So, you can see that the decrease of contributing workers to beneficiaries explains why Social Security will run into a financial dilemma.

This is the problem.

In 2021, Social Security started paying out more benefits than it was collecting.

Unless Congress enacts measures to generate the funds to enable Social Security to continue benefit payments at the current level, something needs to change.

You can think of the Social Security system as a “money in, money out” operation.

In the beginning, with so many workers contributing to the system, the system was able to build up a reserve of cash. That reserve is expected to be depleted by 2034 unless there are changes to the funding mechanisms. If there are no changes, it is expected that Social Security will be able to pay 80% of the scheduled benefits. Using the “money in, money out” theory, enough money will be coming in to pay 80% of the scheduled benefits.

On the current trajectory of benefit payments and a reduced collection stream, eventually the Social Security system will go bankrupt unless changes are made. If no changes are made, benefit payments will be equal to what is collected, then “money in, money out” at 80% of the current benefit schedule. Therefore, Social Security will never go bankrupt, it will just pay out the amount of cash collections received.

What are the changes that can be made to shore up the Social Security system to continue to pay benefits at the current level:

  • Raise the full retirement age past 67
  • All earnings subject to the Social Security tax (OASI-6.2%)
  • Means testing
  • Increase or eliminate the income ceiling
  • Decrease or eliminate the delayed retirement credits
  • Raise eligibility from 62
  • Privatization
  • Reduce or eliminate COLA’s
  • Increase taxability
  • Include all income subject to the OASI tax, not just W-2 and self-employment income

Some of the items above are more palatable than others.

What will the outcome be, I wish I had a crystal ball.

Let me leave you with this one thought for your retirement planning:

I often hear one main reason for filing early is that Social Security is going to go bankrupt. This is basically an emotional response. Now we know the system will not go bankrupt, you may just receive a benefit that is 80% of your current benefit. If you claim benefits early, and no changes are made, you will receive 80% of a smaller benefit than 80% of a larger benefit had you delayed claiming your benefit. So, there is some logic in postponing the receipt of your benefit if you think Congress will make no changes.

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