Q & A
What does “solvency” mean in regards to Social Security?
Complete Question: I’m in my late 20s and it has been more difficult than I expected to get my career going after college. I finally got a good job and it offers a 401k matching program. Even though it sounds good, I just don’t think I can afford losing that extra money out of my paycheck. When I told my parents this, they freaked. They said Social Security will probably not be solvent when I retire and I need to start saving for retirement now, even though I’m so young. What do they mean by Social Security won’t be solvent? I pay a lot of taxes for it out of my paycheck.
Answer: In general, “insolvent” in any business means that liabilities exceed assets. In terms of Social Security, the taxes you are paying out of your check are going towards the OASI (old-age) and DI (disability) Trust Funds (the combined trust funds are called OASDI). The concern your parents are speaking of is a concern many people have. If there are not enough taxes being collected to pay current Social Security benefits, Social Security is considered “insolvent”. Recently, population trends have caused the ratio of workers to retired people to get smaller, which is depleting any reserves in the trust fund (the reserves are the extra funds collected beyond benefits being paid).
Trust fund insolvency has been an even bigger discussion lately because the DI trust fund is expected to become insolvent in 2016. At that time, only 81% of someone’s disability benefit can be paid in order to pay everyone on disability on time. So what does this mean for you, a 20-something thinking about a 401k? The OASI trust fund is also in trouble, just a little later than the DI trust fund – it is expected to be insolvent in the year 2033 and at that time, 77% of benefits can be paid. Imagine working and paying those taxes and then when you retire, you only get 77% of what you expected. That is the situation as it stands now. If you are in your late 20s, let’s say you will retire in 40 years, which is the year 2055. Even though the actuaries at Social Security do not provide a number for that specific year, they expect that 77% to continue declining to 72% in 2088 and you are somewhere in the middle of that. In addition, some advocate transferring funds from the OASI trust fund to the DI trust fund in order to pay disability benefits in full next year, which would cause the OASI trust fund to become insolvent sooner.
The bottom line here is that lawmakers are looking into different options to fix the problem, but this is where it currently stands. In addition, Social Security was never intended to be your entire retirement income; therefore, even if you end up getting 100% of what you are “owed” based on what you paid in, it is never a bad idea to start saving for retirement regardless of how old you are.