Is Social Security Broke(n)?

Is Social Security Broke(n)?

| November 01, 2016

The intent of this article is to summarize the current and future state of affairs of our Social Security system, clear up some myths, and discuss possible solutions to keep it solvent.

I pay attention with great interest to Social Security articles, blogs, books, webinars and software resources. Social Security is a very important resource for us and understanding it better can only be good for us too.

When we read and/or hear that “Social Security is broke” or “Social Security will run out of money by 2034” we may think it’s gone. Not so. The reality is there are fewer workers today and projected to be even fewer workers in the future contributing into the system to sustain the current payout levels for retirees. Projections reveal that in the early 2030’s payout levels will need to be reduced…some sources indicate 20%, some 30%. So the reality is future Social Security payments will not disappear, it’s just that the consequence of maintaining current payout levels AND not making adjustments will require substantial payout reductions in the future. There are several ways to fix the problem and like most issues that require attention, the sooner the better.

Think of it this way. In the past there were sufficient workers contributing to the system, via a payroll tax, to pay benefits (typically adjusted to keep pace with inflation) and create a surplus known as the Social Security Trust Fund. So let’s pretend this trust fund is instead a Social Security checking account, with an ever increasing surplus. This account balance continued to increase because more money was coming in than going out, that is, until around 2010 when the opposite began to happen – less money was coming in than was being paid out. Consequently, the Social Security surplus started to decrease and has been doing so ever since. At this rate the checking account balance is projected to be $0.00 by 2034, forcing reduced retiree benefits directly linked to the worker’s payroll tax income.

A very good article and graphics backing up the following comments and statistics, written by Dave Merrill and Chloe Whiteaker may be found at

So what’s to be done? The following are some possible “one-and-done” provisions, meaning any one of them is projected to be 100% of the Social Security solution.

  1. Add more workers. We could quadruple the number of immigrants into this country each year to 4.4 million workers or double the fertility rate to a level our country has not experienced since 1880. I highly doubt either solution is viable.
  2. Demand that Congress change the Trust Fund investment allocation from 100% US Treasuries to a conservative 40% US Stock/60% US Treasury portfolio. These astute investors would need to earn 20.2% each year for the next 75 years to solve the problem. This is highly unlikely as the last 75 year return for US stocks has been between 7-8%, with some projecting it to be lower moving forward.
  3. Raise the retirement age. For those born after 1959 the full retirement age has already been pushed back to age 67 (the age when one receives 100% of their projected Social Security benefit, as opposed to a reduced benefit if elected early, or an enhanced benefit if elected later). Raising it to age 75 does the trick! I doubt this would be very popular.  
  4. Raise the payroll tax by 20% to 14.98% from the current 12.4%. I doubt this would get much traction as everybody would experience a tax increase, disproportionate to income.
  5. Immediately reduce benefits by 16%. Let’s put some numbers to this. Those expecting a $2,600/mo payout at their full retirement age (the approximate maximum) would now receive just shy of $2,200. Those expecting $2,000/mo would receive $1,680. The average retiree now receiving about $1,350/mo would see their monthly check reduced by $215 to $1,135. For this retiree relying on Social Security for 80% or more of their monthly income, where do they cut $215 per month from an already meager budget?

If you could choose only one option, which one would it be?

Or, how about a diversified, combined approach to eliminate the shortfall?

Pick two of these potent provisions to solve the shortfall: (each provision contributes ~ 50% of the solution to solve the shortfall)

  1. In addition to the payroll tax applied to the 2016 maximum taxable earnings limit of $118,500 (increasing to $127,200 in 2017) add the payroll tax to earnings in excess of $400,000.
  2. Immediately reduce the cost of living adjustment by 1%.  
  3. Increase the payroll tax by 0.1% each year from 2022 to 2041 until it reaches 14.4%.
  4. Gradually increase the retirement age to 70 by 2032, then increase it one more year every 24 years.

Pick three of these less severe provisions to fix it (each contributes ~33% of the solution):

  1. Increase the current earnings limit from $118,500 to $296,700 by 2026.
  2. Apply a 6.2% tax on investment income above $200,000.
  3. In Dec. 2017, reduce the annual cost of living adjustment by 0.5%.
  4. Raise the full retirement age from 67 to 69 by 2022.

Pick five of these gradual, smaller provisions which may also be more palatable for current and future retirees and the economy: (each contributes ~20% of the solution)

  1. Apply a 3% payroll tax on earnings above $118,500.
  2. Starting in 2022, increase the full retirement age one month every two years.
  3. Beginning in 2017, reduce the annual cost of living increase by 0.3%.
  4. Gradually increase the payroll tax rate, currently 12.4% to 13.0% by 2024.
  5. Increase the number of salary years used to calculate retiree benefits, from 35 to 40 years.

Let’s have some fun with this. If each of the:

  • “Pick two” provisions represented 50% of the solution, and
  • “Pick three” provisions represented 33% of the solution, and
  • “Pick five” provisions represented 20 % of the solution…

…how would you mix & match the provisions to come up with 100% of the Social Security solution?

Or, have you come up with any other provisions?

By the way, my answer to this article’s title is “No.” Social Security is not broke(n). It is based on numerous actuarial assumptions (birth rate, payroll tax rate, mortality rate to name a few) which change over time. Therefore, to keep Social Security solvent we need to continually revisit the assumptions and make adjustments. This has not been done in earnest for decades. Yet, every year we fail to make the fundamental modifications to the program the remedies become less effective and more painful.

I am interested in your thoughts.

About Patrick Bradley

Patrick Bradley is a financial consultant with more than 30 years of experience specializing in risk management, legacy planning and business continuity strategies.  His commitment to helping others extends beyond his work and into his community where he is actively involved with multiple organizations.  Learn more by visiting or connecting with Patrick on LinkedIn.