Remember getting your first paycheck with the anticipation of how much you will receive until you see all the taxes taken out of your check? As Americans we pay 12.4% of the first $118,000 earned to Social Security. When you are employed you and your employer each pay half, but contractors pay the full tax amount.
With all that income streaming in you would think there would be a surplus in the fund, but every penny you put in is paid to Social Security recipients. High-income individuals are getting more benefits thus benefits payments are higher than the amount of tax money coming in. In fact, Social Security paid out $848.5 billion to its recipients and they only received $785.6 billion from taxes in 2014. Thankfully interest from trust funds allowed them to make up the difference.
The Cash Flow Breakdown
Trust fund interest saved the Social Security in 2014, but if this deficit continues the fund will only be able to offset until 2034. Due to tax surplus from 1984 to 2009 Social Security has been able to make trillions from the program’s trust funds. From there they bought Treasury bonds usually used for deficit spending.
Here’s how it works:
1. You (if contractor) or you and your employer pay taxes
2. Tax money goes to current recipients
3. Surplus tax dollars go to U.S. Treasury loans
4. U.S. Treasury gives Social Security bonds for the loans
5. U.S. Treasury pays interest on the loans to Social Security
This model will need to be reevaluated before 2020 when the interest no longer covers benefits. Around this time Social Security will begin redeeming the bonds and that Trust Fund will dry up by 2034. When it empties benefits will be cut to give 79% of what is currently being paid out.
What It All Means
If you are currently working then your money is being used for benefits and the interest that has been paid to loans is beginning being paid back to Social Security. The future of the program is very black and white because there’s high certainty with Treasury Bonds. So, the prediction of the extra income covering Social Security vanishing within a short time period is a pretty accurate prediction.
There are really only a couple tools Social Security can use to get them out of this predicament.
• Increase revenue- taxes
• Reduce expenses- how much they pay recipients
• Increase the return rate of its earnings on Trust Funds
What Can You Do?
Thankfully, you aren’t in imminent danger, so there’s time to find a solution and prepare. If the following happens then it’s time to be ready.
• Taxes increase: Cut back on your investments to cover the gap in your paycheck.
• Benefits are cut: Build up your own retirement plan.
• Social Security switches up its investing model: Always make sure you have your own retirement plan in place, don’t solely rely on a new plan.
Social Security will probably find a solution to this issue, but it’s always wise to plan for the worst.
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www.SocialSecurityLawOC.comKenneth G. Marks has been practicing personal injury law since he was admitted to the California Bar in 1981.