September 24, 2008

Is Social Security about to collapse? NO.

Many of us are concerned about the future of social security. We have a legitimate reason to be concerned. With the population of the country growing older and the costs increasing every year it is not hard to see that eventually the tax payers may not be able to support the benefits. Plus if you look at the state of the financial market right now with the government proposing a bailout of the banks, mortgage industry people are worrying more about the certainty of financial system in general.

The Trustees of the Social Security administration put out an annual report on the state of social security. In that report they state a prediction for how long the social security funds will be able to cover the payouts to retirees. The annual Trustee Reports are available at the Social Security site. Right now the 2008 Trustee Report states that "Social Security’s combined trust funds are projected to allow full payment of scheduled benefits until they become exhausted in 2041". So if nothing changes at all then social security will be 100% funded for 33 years. Then even if we do get to the point 30 or so years from now, its quite possible or even likely that the government will either increase taxes or decrease benefits. There is no imminent disaster looming.

While the government currently is saying the system is funded through 2041, they have not always had a consistent prediction. If you look back at the previous years Trustee reports you can see a big variation in the predictions.

Year of SS Trustee report = year funds will run out
1997 = 2029 or 32 years in the future
1998 = 2032 or 34 years
1999 = 2034 or 35 years
2000 = 2037 or 37 years
2001 = 2038 or 37 years
2002 = 2041 or 39 years
2003 = 2042 or 39 years
2004 = 2042 or 38 years
2005 = 2041 or 36 years
2006 = 2040 or 34 years
2007 = 2041 or 34 years
2008 = 2041 or 33 years

The predictions of the social security system are not very reliable. As you can see over the years the prediction for the date which SS would run out of money has changed significantly. Between 1997 and 2008 they revised the date by a difference of 12 years. Also notice that every year the prediction is over 30 years in the future. Back in 1997 it was predicted to fail in 32 years and now 11 years later in 2008 it is predicted to fail 33 years in the future. For 2002 to 2008 the prediction has become more consistent, but given the wide swings in previous years whos to say it won't change by several years again in future predictions.

The estimates from the Social Security Trustees are based on a number of different factors including: birth rates, immigration rates, income growth, employment rates, mortality rates and average retirement ages. All of these figures are variable and could change in coming years. Its hard to predict the future. Its even harder to predict the future 20 or 40 years from now. If anyone one of the variables they are looking at changes significantly then it could throw their 30 year projections off considerably. The Trustee report itself states "Significant uncertainty surrounds the intermediate assumptions".

Different assumptions on the future will give you different results. The SSA report runs the numbers for a 'low cost' alternative and a 'high cost' alternative which are like taking a optimistic view and a pessimistic view. With the low cost alternative they assume good population growth, low inflation and strong economic growth. For the 'low cost' more optimistic figures the social security system is projected to never run out of money based on current tax rates.

Increasing the tax rate would resolve the problem. They've raised the tax rate over the decades so theres no reason to think it won't increase again in the future. The history of the tax rates show a gradual increases over the decades. If they increased payroll tax rate 1.7% between employee and employer or 0.85% increase each then that would ensure funding of social security for the 75 year horizon. Considering that over 60 years ago the tax rate went from 1% in 1948 to 5.05% in 1978 to 6.20% now, it really wouldn't be surprising to see it go up to 7% or so by 2038.

In summary: The social security system is not facing imminent collapse and is fully funded till 2041 under current projections. The projections on the future of social security seem to be a moving target and are continuously revised to push the date out further. An increase in the tax rate for social security similar to increases we've seen in the past would resolve any future funding problems.

So, personally I'm not worried. The system is working fine and should be solid for decades to come. Social Security will need a change at some point in the future but that is not much different than the changes we've had over previous decades.

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