I’m getting more cynical as I get older.
Whenever I hear that Congress has passed something by an overwhelming bipartisan vote, and it has a really nice sounding name, I start getting nervous. After all, the SECURE Act actually made your retirement savings less secure, and the Corporate Transparency Act didn’t require big corporations to do anything, it just required small businesses to have to deal with a lot more paperwork.
So when I heard that Congress passed the Social Security Fairness Act, I instinctively reached back to make sure my wallet was still there.
I was actually relieved to find out what the bill does. Back in the 1970s, a change was made to how Social Security retirement benefits were calculated for government retirees. A lot of people who work for government agencies are exempt from paying into the Social Security system. On the other hand a lot of them work part of their careers for an agency, but another part of their careers they are working for private companies and do have to contribute to Social Security.
Up until now, those government retirees did not get their full Social Security benefit. After the benefits were calculated based on what they paid in, there was a reduction for what they were receiving from their government pensions. So if you worked 20 years for the State, and earned a modest pension, but then went to work for a private company and paid in 20 years toward Social Security, you wouldn’t get the same amount of Social Security that you would have if you just stayed home that first 20 years.
It is hard to disagree with letting those folks get a Social Security check based on what they paid into the Social Security system.
But… the problem is that Congress didn’t do anything to fund this change. And Social Security is rapidly running out of money.
A lot of people think Social Security is like an IRA or an annuity, that you pay something in and the government holds that for you, and then they use that money to pay you a pension when you retire. That isn’t how it works. When the system started way back in 1935, they started paying money out almost immediately. When you make your payment into the system, through payroll taxes, that money goes right back out the door to people who are presently receiving benefits. The assumption is that down the road when you retire, young people who are then working will continue paying into the system, and their payments will be used to pay for your benefits.
In past years, when the baby boom generation was working, there was actually more money going into the system than was being paid out, so there was a surplus that was held in trust for the future. Great, except now the Boomers are retiring and there aren’t nearly as many young people in Generation X, the Millennials, or Generation Z working and paying in. So eventually that trust fund is going to run out.
When? I’ve seen some different figures, but my understanding is that with the increased drain on the system caused by this Social Security Fairness Act, it will be sometime in 2033.
Yes, folks, that’s only eight years away.
That does not mean there will be no Social Security. The best estimates are that the new payments that come in each month, will pay for about 75% of the benefits. If they don’t do anything else between now and then to fix this problem, you could see your Social Security benefit cut by 25%. Oof!
A lot of people are assuming that the government won’t let that happen, that if the money runs out they will simply shovel some more in. But keep in mind that the federal debt is presently at $36 trillion and growing. We may be relying on IOUs from someone who is careening toward bankruptcy.
There are a lot of possible solutions to this. They could reduce benefits by a smaller amount now, which would stretch that potential collapse well into the future. They could increase payroll taxes. They could dump some more money into the system now, while they still have some. Or they could just keep hoping that the economy improves enough to keep things rolling.
Meanwhile, I don’t think I want to rely on future Social Security checks.
Kenneth Kirk is an Anchorage estate planning attorney. Nothing in this article should be taken as legal advice for a specific situation; for specific advice you should consult a professional who can take all the facts into account. If this story upset you, it wasn’t intentional. Have something to calm your nerves.
