Is Social Security Going Away? Let’s Break It Down

Social Security’s trust funds are projected to be depleted by 2033, which would result in automatic cuts to benefits. This is an issue that is on the minds of Americans of all generations, whether they are preparing for retirement, mid-way through their career, or even just starting out. The main question for everyone – no matter what stage of their career – is: will Social Security run out of funds? 

The short answer is, probably not. The widely discussed “insolvency” of Social Security – meaning that benefits will not be able to be paid in full and on-time – is only a risk if action is not taken before 2033: a scenario that is highly improbable. However, to truly understand the program's future, we need to look at its investment strategy, how it operates, and why all of this matters.

How Is Social Security Funded?

First, we take a look at how Social Security is funded. Social Security relies primarily on two sources for funding:

1. Payroll Taxes: A fixed percentage of employment income is allocated to fund Social Security benefits.
2. Interest Earned by the Social Security Trust Fund: This is where the trust fund’s investment strategy comes into play.

Let’s dive deeper into how the Social Security Trust Fund generates interest.

The Social Security Trust Fund Investment Strategy

At this time, the Social Security trust fund is restricted to investing solely in U.S. Government Treasury Securities, which are considered low-risk assets. 

Here is what that includes:

• Special Nonmarketable Securities: These bonds are issued exclusively for the trust funds. While not publicly traded, they are redeemable at full value anytime – making them both secure and flexible, though they come with relatively low interest rates.
• Short-Term Certificates of Indebtedness: These securities mature annually and provide additional liquidity to the trust fund.
• Bonds with Terms of 1 to 15 Years: Longer-term investments that provide steady returns over time.

What Does This Mean for You?

The general structure of Social Security has remained largely unchanged since its inception in 1935, becoming fully operationalized in 1940. Unlike the fluctuations typically seen in the S&P 500 and other market indices, the Social Security trust fund’s investments are shielded from market volatility, as it does not invest in the stock market. As a recipient, this means that shifts in market trends have no direct impact on the benefits paid out. Rather, Social Security provides stability and protection from market volatility for retirees who might not be able to take on or manage investment risks themselves.

Additionally, Social Security enjoys a significant safety net, selling its bonds back to the government at full value when needed, or when there is excess revenue. This unique provision ensures liquidity and stability, which is something traditional portfolio managers can only dream of and retirees can rely on to ensure income stability and protection from hardship.

Adjustments to Ensure Social Security’s Solvency

Social Security has been a pillar in American retirement for almost 100 years, and it is not going away anytime soon. However, it does not mean that adjustments do not need to be made to ensure its long-term sustainability, so that retirees can continue to receive benefits for years to come. 

These changes include: 

1. Changes to Claiming Strategies: Over the years, the government has limited certain claiming options to reduce payouts.
2. Raising the Full Retirement Age (FRA): As life expectancy increases, gradual shifts to later retirement ages help balance the system.

On an annual basis, the government assesses these changes, based on the ratio of contributors (taxpayers) to beneficiaries (retirees).

Is My Social Security Check Going Anywhere?

Your check is more than likely safe, even beyond 2025, as Social Security's funding mechanisms continue to evolve.

For example, 12.4% of most employment income is taxed for Social Security, with self-employed individuals paying the full amount and regular employees splitting this tax with their employers. However, not all income is taxed due to the annual earnings cap.

• In 2024, earnings above $168,600 are exempt from Social Security taxes.
• In 2025, this cap rises to $176,100.

To put this in perspective, the taxable earnings base was just $142,800 in 2021 – constituting a significant increase over the past several years. Every year, the earnings cap is expected to continue to increase, as it automatically adjusts based on inflation – meaning that more high-earners will continue to see Social Security taxes taken out of their income. This adjustment in funding further guarantees that Social Security will continue to be around for years to come. 

Understanding Taxation of Social Security Benefits

As a retiree, or someone who is preparing for retirement, it is important to understand how taxation works for Social Security benefits. Depending on your combined income, a portion of your Social Security benefits may be taxable:

Step 1: Calculate Combined Income
Take the sum of the following:

• Adjusted Gross Income (AGI)
• Non-taxable interest
• Half of your Social Security benefits

Step 2: Determine Taxable Benefits
Based on your filing status:

• Single:
  • $25,000–$34,000: Up to 50% of benefits taxable
  • Over $34,000: Up to 85% of benefits taxable
• Married Filing Jointly:
  • $32,000–$44,000: Up to 50% of benefits taxable
  • Over $44,000: Up to 85% of benefits taxable
• Married Filing Separately:
  • Most benefits are taxable.

Why This Matters

As Washington begins to turn over to the next administration and with shifts simultaneously occurring in Congress: new political agendas and policies are bound to emerge. One of these focus areas is around Medicare. 

At the moment, taxation of Social Security benefits is a significant funding source for Medicare. As the government looks for ways to reduce government spending in the future, however, altering how Social Security benefits are taxed or how funds are allocated might become a viable strategy. With partisan shifts occurring in Washington, it is almost a guarantee that there will be changes made to both Social Security and Medicare. 

The Takeaway

While Social Security is unlikely to vanish anytime soon, despite what some might say, the system will continue to adapt through incremental changes to secure its longevity. Whether it is modifying claiming strategies, raising the earnings cap, or adjusting benefit taxation, it is essential to stay informed of each change and remain proactive in your retirement planning.

We urge you to speak with your Farther advisor if you have any thoughts or questions about Social Security and how changes in this system might impact you.

‍