As we noted in our coverage of the 2019 annual report of the trustees of the Social Security and Medicare funds released on Monday, the Old Age and Survivors Insurance (OASI) that most Americans depend on for some or all of their retirement income will exhaust its funds in 2034 and, unless Congress and the president act to top up the funds, full retirement benefits will not be paid beginning in 2035.
The impact on most Americans will be severe. In a report from the Federal Reserve Bank published in February, the researchers found that more than 80% of the wealth in both defined benefit pension plans and defined contribution plans (401(k)s) was held by the top 25% of the U.S. wealth distribution. The bottom half of the distribution holds just 4%. That half is the most threatened by a drop in Social Security benefits: “[I]n the bottom half of the wealth distribution, Social Security dominates employer-sponsored retirement plans by a wide margin.”
Why Is Social Security Running Out of Money?
The OASI fund depends on contributions from people who are currently working and paying Social Security taxes and interest on the balance being carried forward in the fund. Over its 84-year history, Social Security taxes have collected $21.9 trillion tax receipts and paid out $19 trillion in benefits. The remaining $2.9 trillion will begin to be drawn on beginning in 2020, according to the new trustees report. By 2035, that fund will be exhausted and tax receipts will not cover the benefits for current retirees.
Does That Mean I Won’t Be Paid a Retirement Benefit?
No. However, unless the Congress acts to boost the withholding for Social Security, you will receive less than you would be entitled to under the current retirement benefit. The trustees estimate all Social Security retirement benefits will be reduced by 25%.
When Can I Begin Receiving Retirement Benefits?
Under current law, you can begin collecting Social Security benefits when you reach the age of 62, or earlier under certain conditions. Your eligibility for full benefits depends on the year you were born. If you were born in 1953 or before, you are eligible for full benefits when you reach 66. If you were born in 1954, for example, you become eligible when you reach 66 years and two months of age. For every birth year between 1955 and 1960 or later, the eligibility age increases by two months until reaching 67 for people born in that later period. Under current law, you must begin collecting benefits when you reach 70 years of age.
How Are Social Security Retirement (OASI) Benefits Calculated?
The Social Security Administration (SSA) calculates your 35 highest-paid years and then adjusts for inflation. For example, if you earned $14,500 in 1982, that works out to an inflation-adjusted total of $37,320 in 2018 dollars and the SSA will use the 2018 value to compute your benefit.
I’m 50 Years Old; Am I Screwed?
Not exactly. You can choose to begin collecting benefits when you reach 62; however, that benefit is permanently lower than the amount you would receive if you wait until you reach 67, the age at which you would receive full benefits. The catch though is no one knows now what the full benefit will be in 2035 under the current projections. What is known is that taking Social Security benefits beginning at age 62 permanently reduces your benefits (under current law) by about 25%.