09 Mar Do I really pay Social Security for other people?

Q. Is it true that what you pay into Social Security throughout your working life is not put into an account for you, but instead is used to pay for benefits already being received by others?
— Confused

A. Yes, that’s exactly how it works. What you pay in now doesn’t specifically go to an account for you.

Let’s go a little deeper.

There are a few components of Social Security.

First, it is funded by payroll taxes at a rate of 6.2% for the employer and 6.2% for the employee, so effectively, 12.4% of your pay goes into this fund annually, said Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Boonton.

“The money is stored in the `Old Age and Survivors’ trust fund,” Lynch said. “Money goes into this trust fund and it is used to pay out claims.”

At the end of 2018, the trust held around $2.9 trillion in assets, and in that year it increased by $3 billion after all expenses and income, Lynch said.

That’s good news, but here’s the problem.

“Baby boomers are all starting to hit retirement age, which are increasing claims and reducing workers paying into the system,” he said. “This is going to cause a deficit and start depleting the $2.9 trillion dollars.”

With no changes over the next few decades, Social Security will have severe financial issues, Lynch said.

So how do we fix it?

Lynch said it’s not that hard to fix, but it’s a political football.

First, he said, the federal government could increase the wage base. Right now Social Security taxes only come out of the first $137,700 you earn.

“If they doubled that or even made it unlimited, this would take a huge chunk out of making the program solvent,” Lynch said.

Next, the retirement age could be increased.

“When Social Security was set up, the average life expectancy was 64, so you were never really supposed to get this benefit,” Lynch said. “Now the average life expectancy is in the mid 80s. Pushing out the benefit based upon longer life expectancy is reasonable and would also help tremendously.”

There has also been discussion of an income or asset-based phase-out, which would eliminate benefits for people over certain thresholds.

Lynch said he doesn’t like that option because he believes it would be unfair to taxpayers.

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This story was originally published March 9, 2020.

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