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Bibi Taylor: Framing the Social Security Debate

It makes a lot of sense that Social Security stories get top billing in the media. The Social Security system touches more lives than just about any other federal program. By the end of 2012, $786 billion was paid in benefits to 57 million Americans. Another 161 million people paid payroll taxes into the system.

Bibi Taylor
Bibi Taylor

When President Franklin D. Roosevelt initiated the program in 1935 to foster inter-generational transfers of wealth, it would have been fairly inconceivable that the program would grow to its present-day largess.

The first recipients of Social Security benefits retired in 1940. Interestingly, however, back then the average life span was only 61.6 years. People are living on average 17 years longer today.

For its first nearly 50 years, Social Security was a pay-as-you-go system. Tax receipts funded benefits paid. In anticipation of the onslaught of baby-boomer-aged professionals nearing retirement, in 1983 Congress made sweeping changes. Increased payroll taxes provided the lion share of Social Security revenue. For nearly three decades, the system collected significantly more than it paid in benefits and invested the surplus in special non-tradable Treasury bonds. The interest was credited to the Social Security System’s two trust funds.

As of Sept. 30, 2013, the trust funds together held more than $2.8 trillion in Treasuries. These funds are separate from the federal government’s budget, and as such have maintained high surpluses. Some years the surplus has reached as high as $153 billion. The president can borrow from these surpluses, but loans must be repaid with interest.

The problem that has plagued the program since 2010 and is expected to continue is that expenses outpaced revenues. The gap amounted to roughly $55 billion in 2012 and was covered with credited interest in the trust funds. The system can continue covering the deficit in this way until 2020 at which time Treasuries must be redeemed to meet benefit obligations.

Upon depletion of the trust funds, which is projected to occur in 2033, the program — if unchanged — will rely solely on tax revenue. This will only cover about three-quarters of the scheduled benefits.

Over the course of the upcoming years, we can expect a number of debates about potential changes to the program. Some changes under consideration include changing the formulas for calculating benefits, potentially increasing payroll taxes and increasing the cap on taxable wage income (currently $113,700).

While the debate over the future of Social Security rages on in Washington, Americans can take steps to secure their own financial future. Talk to a financial advisor about creating guaranteed income streams throughout your retirement and other ways to supplement your Social Security benefits.

Please feel free to email any Social Security questions you may have to [email protected].

— Bibi Taylor, MBA, is a wealth manager for AmeriFlex, 3700 State St., Suite 310, in Santa Barbara. Call 805.898.0893 for more information.

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