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The 2022 Social Security Trust Report that outlines the financial status of the program was released last week. Here’s a link to the report in case you missed it!
You can choose to read through all 275 pages, or you can spend three minutes with us today for a quick summary of the report.
Page 13 of the report summarizes our current dilemma that we all face, stating the Social Security Trust Fund asset “reserves become depleted and unable to pay scheduled benefits in full on a timely basis in 2035. At the time of depletion of these combined reserves, continuing income to the combined trust funds would be sufficient to pay 80 percent of scheduled benefits. The OASI Trust Fund reserves are projected to become depleted in 2034, at which time OASI income would be sufficient to pay 77 percent of OASI scheduled benefits.”
This means that unless a serious change is introduced to the Social Security system, and fast, that recipients would experience a 23% cut in their benefits received starting in 2025.
So what are OASI Trust Fund reserves, OASI income and OASI scheduled benefits? And how does that affect you?
The Old-Age & Survivors Insurance (OASI) Trust Fund reserves were created as part of the Social Security Act Amendments in 1939. These reserves act as a separate account in the US Treasury that allows the Social Security Administration to pay benefits without having to consistently request funds from Congress.
The income to the OASI fund is deposited from payroll taxes on earned income that are not immediately used. To see a summary of the account reserves, income, and expenses every year since 1937, click here.
Our Perspective: The Good, The Bad and The Ugly
The good news is that the 23% benefit cut is actually less harsh than the last projected benefit cut. Back in August 2021, we wrote about the existing Social Security report which suggested that starting by the year 2034, the recipients would see a roughly 25% cut in benefits. You can find more details of the previous report here.
The bad news is that this lower benefit cut is based on assumptions that may not be sustainable. The actuarial deficit decreased in this year’s report because of changes in the assumptions, not changes in the fundamental economics of the model.
While Social Security isn’t technically a “pyramid” scheme, many aspects of Social Security borrow from the same business model made famous in the 1920s by Charles Ponzi. Social Security promises a series of benefits to individuals that pay into the system for a certain number of years, funded through current contributions by other members. As with most pyramid schemes, trouble occurs once the pyramid becomes too big, and there aren’t enough members paying into the program to pay for those receiving benefits. Because nearly all US taxpayers are required to pay into Social Security, the best way to see the future contributions coming into the system is by looking at trending birthrates, which brings us to the ugly news.
The U.S. birth rate has fallen by 20% since 2007. This decline cannot be explained by demographic, economic, or policy changes. With an aging population and a shrinking birth rate, models that require new blood to feed the system are destined for trouble.
What to do to Maximize Benefits
To counter-act the coming reduction in scheduled benefits, major changes will need to be enacted by the US government to keep the OASI fund afloat. While some of these changes will be inevitable, and will be experienced by everyone, there are some ways that you can prepare for your own benefit and maximize the amount you receive from Social Security. The following three tips are taken from 5 Ways to Maximize Your Social Security Benefit.
1. Work at Least 35 Years
Social Security benefits are based off your highest 35 earning years. That means if you retire with only 30 years of Social Security tax paid in, your benefit will be averaged by calculating 5 years of $0. Additionally, if you retire with exactly 35 years of earnings, your early earning years could negatively impact your overall benefits due to the low wages you received in your teens.
2. Wait to Claim Benefits Until your Full Retirement Age
Claiming your benefit early will result in 6% haircut for each year you claim prior to your full retirement age. This means that taking your Social Security early could reduce your benefit by 30% for the rest of your life.
3. Delay Claiming Benefits until age 70
In our previous point, we discussed waiting until full retirement age to claim your Social Security benefits. By waiting until 67, your monthly payment would increase by 30%. If you have the financial capacity to hold out 3 more years, delaying your Social Security to age 70 could increase your benefit by another 24%.
Effect on Social Security by Claiming Early or Delaying Benefits
$3,000 FRA monthly benefit, 2% COLA
Claiming Age | Annual Benefit | Lifetime Benefits Received by Age 80 |
62 | 25,200 | $575,582 |
67 | 36,000 | $575,062 |
70 | 44,640 | $543,211 |
This article is a general communication being provided for informational and educational purposes only and is not meant to be taken as tax advice, investment advice or a recommendation for any specific investment product or strategy. The information contained herein does not take your financial situation, investment objective or risk tolerance into consideration. Readers, including professionals, should under no circumstances rely upon this information as a substitute for their own research or for obtaining specific legal, accounting or tax advice from their own counsel. Any examples are hypothetical and for illustration purposes only. All investments involve risk and can lose value, the market value and income from investments may fluctuate in amounts greater than the market. All information discussed herein is current only as of the date of publication and is subject to change at any time without notice. Forecasts may not be realized due to a multitude of factors, including but not limited to, changes in economic conditions, corporate profitability, geopolitical conditions, inflation or US tax policy. This material has been obtained from sources believed to be reliable, but its accuracy, completeness and interpretation cannot be guaranteed.
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