According to the Social Security Administration, a recent report showed that almost half of retired workers rely on Social Security for at least 50% of their income, with 21% of married couples and 45% of unmarried individuals relying on Social Security for 90% or more of their income. Considering that approximately 94% of American workers are covered by Social Security and 65 million people are presently receiving benefits, maintaining the health of Social Security is a top priority. Social Security is not in danger of going bankrupt because it is predominantly funded by payroll taxes, but its financial health is deteriorating and benefits may be reduced if Congress does not act. As an employee of Fortune 500 who may be eligible for these benefits, it is essential to monitor policy changes and reductions.
Annually, the Trustees of the Social Security Trust Funds provide Congress with a comprehensive report evaluating the financial health and outlook of this program. For employees of Fortune 500, remaining current on these reports could allow for better financial planning. The most recent report, released on June 2, 2022, indicates that the pandemic's effects were not as severe as predicted in last year's report; this is positive news for Fortune 500 employees this year.
Overall, the news is mixed for Social Security
As an employee of Fortune 500, it is essential to understand that the Social Security program is comprised of two separate programs, each with its own financial account (trust fund) that holds the payroll taxes used to pay Social Security benefits. The Old-Age and Survivors Insurance (OASI) program provides monthly benefits to retired workers, their families, and the survivors of workers; the Disability Insurance (DI) program provides monthly benefits to disabled workers and their families. As an employee of Fortune 500, you must review these benefits to determine if you or your family members qualify. These accounts also receive reimbursements from the General Fund of the United States Treasury and income tax revenue from benefit taxation.
As an employee or retiree of Fortune 500, you should be aware that money not required in the current year to pay benefits and administrative expenses is (by law) invested in interest-bearing, government-guaranteed Treasury bonds. The Social Security Trust Funds have accumulated reserves that can be used to cover benefit obligations if payroll tax revenues are insufficient to pay full benefits, and these reserves are currently being depleted. Due to an aging population and other demographic factors, worker contributions are no longer sufficient to finance existing benefits. As an employee of Fortune 500, it is essential to evaluate these trends and prepare for potential financial difficulties.
In the most recent report, the Trustees project that Social Security will have sufficient funds to pay full retirement and survivor benefits until 2034, one year later than in the report from the previous year. At that point, the reserves will be depleted, and payroll tax revenue alone will be sufficient to pay only 77% of scheduled OASI benefits, falling to 72% by 2096, the end of the 75-year, long-term projection period. As an employee of Fortune 500, it is crucial to account for Social Security's lack of funding and the prospect of reduced OASI benefits.
The Disability Insurance Trust Fund is projected to be much healthier over the long term for disabled Fortune 500 employees than last year's report predicted. The Trustees now anticipate that the fund will be able to pay full benefits until 2096. The report from the previous year projected that it would only be able to pay scheduled benefits until 2057. Since 2010, applications for disability benefits have decreased significantly, and the number of employees receiving disability benefits has decreased since 2014, a trend that continues to impact the long-term outlook. As a potential disabled employee of Fortune 500, it is essential to consider the change in projected reports in order to avoid being caught off guard.
One year later than last year's report, the combined reserves (OASDI) will be able to pay scheduled benefits until 2035, according to the Trustees report. After that, payroll tax revenue alone should be sufficient to cover 80 percent of scheduled benefits, declining to 74 percent by 2096. As an employee of Fortune 500, you must keep in mind that OASDI projections are speculative, as the OASI and DI Trust Funds are separate and one program's taxes and reserves cannot generally be used to fund the other. Congress could alter this, and combining these trust funds in the report is a way to illustrate Social Security's financial outlook as a whole. Accounting for the projections will defend employees of Fortune 500 from eventual declines that would otherwise be unplanned.
For Fortune 500 employees, it is essential to note that all projections are based on current conditions and best estimates of likely future demographic, economic, and program-specific conditions, and that the Trustees acknowledge that the pandemic's progression and future events may impact Social Security's financial status.
On ssa.gov, you can view a copy of the 2022 Trustees report.
Many options for improving the health of Social Security
The combined OASDI reserves will be depleted between 2033 and 2035, according to projections made in the last 10 Trustees Reports. The Trustees continue to urge Congress to address the financial challenges confronting these programs so that solutions are less drastic and can be implemented gradually, mitigating the public's impact. Among the many options proposed are those listed below. Combining several of these may mitigate the effect of any one solution.
Increasing the present rate of the Social Security payroll tax, which is 12.4%. Half is paid by the employee and half by the employer; sole proprietors pay the entire 12.4%. To cover the long-term revenue shortfall, an immediate and permanent payroll tax increase of 3.24 percentage points to 15.64 percent would be required.
- Raising or eliminating the cap on wages subject to Social Security payroll taxes ($147,000 in 2022). Raising the complete retirement age above the current age of 67 (for those born after 1960).
- Increasing the age of early retirement beyond the current 62
- The reduction of prospective benefits. To address the long-term revenue shortfall, it would be necessary to immediately and permanently reduce scheduled benefits by approximately 20.3% for all current and future beneficiaries, or by approximately 24.3% if reductions were applied only to those who initially become eligible for benefits in 2022 or later.
- Changing the calculation formula for benefits.
- Using a distinct method to calculate the annual cost-of-living adjustment (COLA) for benefits.
You can find a comprehensive list of potential solutions at ssa.gov/OACT/solvency/provisions.
Conclusion
Social Security can be compared to a sturdy bridge that provides a crucial pathway for retirees to cross from their working years to a financially stable retirement. Just like a bridge requires regular maintenance and upgrades to ensure its longevity, Social Security must be carefully monitored and updated to keep up with changing economic and demographic conditions. By understanding the importance of this "bridge," retirees and Fortune 500 workers can make informed decisions about how to maximize their Social Security benefits and ensure a smooth transition into retirement.
Reference(s):
1) Administration of Social Security, 2022
2) Social Security Administration, "Retirement Benefits," 2021