In a negative real interest rate environment, these expectedbenefit payments for a surviving spouse can have significantvalue. The calculations move from a single mortality table toa joint mortality table in which the increased Social Securityearnings continue until the death of the surviving spouse.
There is about a 50% chance that a spouse in a healthyopposite-sex couple will still be alive at the age of 95.Benefit increases tied to delayed claiming are spread overa greater number of expected life years, further increasingthe present value.
Helping Clients Make Better Choices
Many retirees suffer from a behavioral phenomenon knownas narrow framing. They aren’t easily able to disentangle thedecision to claim Social Security from the decision to retire.Many also express discomfort at the prospect of spendingdown savings in order to fund early retirement expensesbefore Social Security kicks in.
One way to encourage clients to accept Social Securitydeferral is to focus their emotions on something they maydislike more than spending down savings — paying higher
The Social Security Trust Funds, Explained
Is the Social Security trust fund in trouble? Yes. The government has spent excess payroll taxes to cover current federalspending for decades.
Does this mean that retirees won’t receive a Social Securitypaycheck? No. Retirees will continue to get paid as long asthere are workers making contributions.
Is there a possibility that promised income payments will
receive a haircut in the future? Yes, but the cut is unlikely to be
as big as many pessimists imagine.
Are increasing payments to Social Security going to impactthe federal budget? Absolutely, and advisors should understandthe consequences for expected taxes for workers and retirees,and for other benefits that may be reduced for high earners.
Trust Funds and Their Financing
It is important to note that the Social Security program has twolegally separate trust funds.
The Old-Age and Survivors Insurance (OASI) trust fund provides benefit payments to retired workers, their spouses, somechildren, and the survivors of deceased workers.
The Disability Insurance (DI) trust fund provides benefits todisabled workers and their spouses and children.
Social Security paid out $1 trillion in benefits during 2019,almost one-quarter of the entire $4.4 trillion federal budget. Ofthese benefits, 86% came from the OASI trust fund and 14%from the DI trust fund.
The size of the Social Security trust funds is the value ofthese trust fund bonds. At the point when income is no longersufficient to cover full benefits, the bonds in the trust funds areredeemed in order to continue paying full benefits.
When all of the bonds are redeemed, and the trust funds aredepleted, Social Security only can pay out in benefits what itreceives in income from Social Security payroll taxes.
The trust funds are primarily financed by a tax, currently
12.4% ( 6.2% each by employers and employees), on coveredwages up to $137,700 for 2020 and $142,800 for 2021. Of the12.4%, 10.6% goes to the OASI trust fund and 1.8% to the DItrust fund.
The trust funds receive additional revenue from income taxeson benefits (a backdoor type of means testing) and interestpaid on the bonds held in the trust fund (a form of intragovern-mental transfer).
Total revenues into the trust funds in 2019 were just over$1 trillion, with $944.5 billion from payroll taxes, $80.8 billionfrom interest earned on trust fund assets, and $36.5 billion onthe taxation of benefits.
It’s important to keep in mind that while the Social Securitypayroll tax rate is 12.4%, the total payroll tax rate is 15.3%when the 2.9% Medicare Hospital Insurance tax is included.
When will the Social Security trust funds run out?According to the Social Security Trustees, the combinedOASI and DI trust funds face a financial shortfall of $16.8trillion in present value through 2094 and $53.0 trillion overan infinite horizon.
Further, the Social Security trust funds will be depleted andunable to finance full benefits in 2035. Separately, the OASItrust fund will be depleted in 2034, but the DI trust fund willrun out in 2065.
Although the date of depletion for the combined trust fundsvaries somewhat from year to year based on economic conditions, for the last 20 years the Trustee reports have consistentlyestimated that the combined trust funds will be exhaustedbetween 2037 and 2042.
Unless Congress takes action to reform Social Security, theprogram will only be able to pay approximately 75% of estimated benefits when the OASI trust fund runs out of assets in2035. For DI, trust fund exhaustion in 2065 will reduce the pay-out to about 90% of scheduled benefits.
There’s a very large caveat, though, with respect to the2020 Social Security Trustees’ report; it was finalized before