The 2018 Social Security and Medicare Boards of Trustees announced that the Social Security program’s cost will exceed its income this year for the first time since 1982, forcing the program to dip into its nearly $3 trillion trust fund to cover benefits. Congress established trust funds managed by the Secretary of the Treasury to account for Social Security and Medicare income and disbursements. The Treasury credits Social Security and Medicare taxes, premiums, and other income to the funds.
Unless Congress decides to bolster the program’s finances, it is expected that the combined trust funds will be depleted in 2034, the same year projected in last year’s report. The report further holds that, thereafter, scheduled tax income is projected to be sufficient to pay about three-quarters of scheduled benefits through the end of the projection period in 2092. However, the belief is that Congress will ultimately act to bolster the program’s future when required.
In general, Social Security consists of two portions, one for retirees and one for people who claim disability benefits. According to the report, over the program’s 83-year history, it has collected roughly $20.9 trillion and paid out $18.0 trillion, leaving asset reserves of $2.9 trillion at the end of 2017 in its two trust funds.
So, what is the main impact of the recent Social Security report? Even if Congress acts to bolster the Social Security program sometime in the future, it is clear that Americans, in particular Millennials, must take advantage of the attractive, privately funded retirement options Congress has made available, specifically the IRA and 401(k) plan options.
The primary advantages of making private retirement contributions is that the earnings will grow tax-deferred, or in the case of a Roth IRA or Roth 401(k) plan, tax-free. The concept of tax deferral is premised on the notion that that all income and gains generated by the pre-tax retirement account investment would flow back into the retirement account without tax. Instead of paying tax on the returns from the retirement account investment, such as on the sale of a mutual fund, tax is paid only at a later date, or not at all in the case of a qualified Roth IRA or Roth 401(k) plan distribution, leaving the investment to grow unhindered.
For example, if a thirty-year old individual contributed just $1,500 a year to an IRA through the age of seventy, assuming she earned an 8% annual rate of return, she would have $419,672 at age seventy, versus just $293,770 in a taxable account. In addition, making a pre-tax IRA or 401(k) plan contributions provides an immediate tax deduction which can reduce one’s taxable income (for each year a contribution is made).
If something positive can be taken from the report’s findings that the Social Security program’s cost will exceed its income this year for the first time since 1982, it is that counting on the government for all of your retirement benefits may not be the wisest approach. Congress has giving all of us a golden opportunity to save for retirement by making the private retirement system so tax advantageous. However, it is up to all of us to take advantage of it so that we do not become excessively dependent on the need for full government Social Security benefits in the future.