"I'll never get a cent from Social Security."
That thinking couldn't be more wrong. Social Security is one of the most popular government programs around, as our political leaders well understand -- Social Security will be around as long as democracy reigns, in other words.
The news media often don't help by running scary headlines suggesting that the Social Security Trust Fund will run out of money in the not-too-distant future. So it is understandable that many people mistakenly conclude that they won't receive any benefits.
The fact is that under current law, the Social Security Trust Fund could run bone dry and you'd still get most of your benefits. You see, the Trust Fund is only a supplemental source of funding for Social Security. Most of your Social Security retirement and disability benefits are actually funded from taxes collected each pay period from current workers (That's the deduction for FICA taxes on your paycheck).
The bottom line: As long as workers are paying FICA taxes, there will be money to pay for Social Security benefits for retirees and their beneficiaries.
Here's what has many people in a tizzy. Until 2010, FICA taxes collected from workers during the year were more than sufficient to pay for the Social Security benefits of retirees and beneficiaries each year. The excess taxes collected over benefits paid were added to the Trust Fund every year.
Starting in 2010, however, taxes collected weren't sufficient to fund that year's benefit payments, and supplemental monies from the Trust Fund was needed. For example, for 2014 Social Security projects it will pay $863.8 billion in benefit payments, but collect $769.5 billion in FICA taxes, plus an additional $30.1 billion in income taxes on Social Security benefits.
But that, too, is nothing to worry about. Interest earnings on the Trust Fund will more than make up the remaining gap between benefits paid and taxes collected.
Social Security's 2013 Trust Fund report projects that the combined retirement and disability fund will be exhausted in 2033; at that time, taxes collected from workers during that year are projected to cover just 77 percent of benefits due at that time.
Under the law, if Congress doesn't agree on a plan of action to close the funding gap, benefits would need to be reduced so that taxes collected would equal benefits paid. Even in this worst-case scenario, however, retirees would still receive, on average, about 77 percent of the benefits they're expecting to get. While that certainly wouldn't be good news, benefits wouldn't go anywhere near zero.
Meanwhile, Social Security's long-term funding deficit can be reduced or eliminated with some combination of tax increases or benefit cuts phased in over time. For example, the long-term deficit could be eliminated without raising taxes if benefits were immediately reduced by 16.5 percent in aggregate. Congress could reduce benefits by increasing the retirement age, reducing the amount of monthly benefits, slowing increases in the cost of living adjustment, or some combination of these methods.
The long-term deficit also could be eliminated without reducing benefits if taxes were immediately increased by 2.66 percent of total covered payroll. You currently pay 6.2 percent of your earnings, up to $117,000, to fund retirement, survivors and disability benefits; your employer pays an equal amount. Congress could raise taxes by increasing the tax rate, increasing the limit on the amount of compensation that's subject to taxes, or some combination of the two.
Some people claim that any tax increase is bad for the economy, but it's tricky to draw definitive conclusions one way or the other. For example, most Social Security benefits are spent quickly by the recipients. As a result, tax increases that fund Social Security benefits almost immediately get recycled into the economy.
While none of the above tax increases or benefit reductions would be good news, they wouldn't be devastating.
Another way of looking at Social Security's long-term deficit is that it equals about 0.9 percent of U.S. gross domestic product over a 75-year period. In all likelihood, a combination of small tax increases and means-tested benefit cuts will be the most palatable solution, and that could certainly be achieved by a Congress that has the courage to lead us in the direction we need to go.
It turns out that the real "trust fund" is the collective ability of current and future workers to pay their FICA taxes to support benefits for current and future retirees and beneficiaries, and the willingness of Congress to make the necessary modest adjustments to bring the program into long-term financial balance. Given the tremendous popularity of Social Security, that shouldn't be so hard.