How Can You Supplement Your Social Security Income
When it comes to investing for retirement, it’s essential to start saving as early as possible whether that’s through an employer-sponsored 401 or pension plan or through an individual retirement account.
Though experts recommend saving between 10% and 15% of your annual income, you can start small and increase your savings rate over time, especially if you have outstanding debt from credit cards, healthcare expenses or student loans.
If you have an employer that matches your 401, maxing out your matching contributions should be your first priority as it’s essentially free money. Many employers will offer to match typically between 2% and 4% of an employee’s annual salary.
After you’ve maximized your employer match, you might consider opening an individual retirement account which is a retirement account separate from your employer. The traditional retirement account and Roth IRA are two types of popular retirement accounts.
Both retirement accounts offer different tax advantages. A Roth IRA is an after tax retirement account where individuals use income that’s already been taxed and their investments grow tax-free over time. This means you won’t have to pay taxes on your investment gains later in life.
On the other hand, a traditional IRA is a pre-tax retirement account where individuals’ contributions are tax deductible now, but they’ll have to pay income taxes later when they withdraw money in retirement.
What Is The Trust Funds Financial Status
If Social Securitys trust funds run out of Treasury bonds to cash in, benefits would not stop contrary to a common misunderstanding.
Social Security is adequately financed in the short term but faces a modest long-term financial shortfall amounting to 1.1 percent of gross domestic product over the next 75 years, the period that the programs actuaries use in evaluating Social Securitys long-term finances.
Following the bipartisan Social Security financing deal in 1983, Social Security ran a surplus every year until 2021. Starting in 2021, Social Securitys total cost exceeded its total income. However, the trust funds reserves supplement the programs income from payroll taxes, income taxes on benefits paid to higher-income beneficiaries, and interest earned on the trust funds bonds to enable Social Security to keep paying full benefits until 2035.
If Social Securitys trust funds run out of Treasury bonds to cash in, benefits would not stop contrary to a common misunderstanding. At that point, if nothing else is done, Social Security could still pay 80 percent of promised benefits using its annual tax income. Of course, paying less than full benefits is not an acceptable way to run this vital program, and Congress will need to act to strengthen its long-term finances.
When Will Social Security Run Out Projections Now Suggest Insolvency By 2033
First, it is important to note that Social Security will not actually run out of money. However, the money being brought into the program will soon not be enough to cover the benefits being paid out and most people refer to this as running out of money. And, the deficits in the program may cause benefits to be cut.
A new report from the Social Security and Medicare Board of Trustees finds that Social Securitys surplus reserves are expected to run out in 2033, a year earlier than previously forecast.
If nothing changes, the Social Security Administration has stated that in 2033, The funds reserves will become depleted and continuing tax income will be sufficient to pay 76 percent of scheduled benefits. Sounds ominous. However, it is still more optimistic than findings from a report last year from the Bipartisan Policy Center , a Washington D.C.-based policy think tank, suggests that Social Security will run out of money in 2028.
Recommended Reading: Social Security Office In Vidalia
Don’t Lose Your Nerve
With the threat of Social Security cuts likely overstated, there’s good reason simply to follow your optimal strategy for claiming benefits. For some, that will mean waiting longer before claiming benefits, in the hopes of receiving higher monthly checks long enough to come out ahead. For others, claiming at full retirement age or before will make more sense.
Regardless, though, trying to anticipate the future of Social Security is unlikely to get you a better result. You’re better off working through the scenarios that are most likely and then coming up with a game plan that’s flexible enough to deal with whatever comes your way.
The Motley Fool has a disclosure policy.
Policy Basics: Understanding The Social Security Trust Funds
Few budgetary concepts generate as much unintended confusion and deliberate misinformation as the Social Security trust funds. The trust funds are invested in Treasury securities that are just as sound as all other U.S. government securities, held by investors around the globe and regarded as being among the worlds safest investments. Starting in 2021, Social Security began drawing down trust fund reserves to help pay for benefits. Although Social Security has a long-term financial shortfall that must be closed, the programs combined trust funds will not be depleted until around 2035, which gives policymakers time to develop a carefully crafted financing plan.
Read Also: Alabama Social Security Office Phone Number
Inflations Effect On Social Security
COLA is the increase made to Social Security and Supplemental Security Income to counteract the effects of inflation. In 2022, individuals currently receiving Social Security benefits will receive a 5.9% increase, the highest raise since 1982. To determine the exact dollar amount you will receive in 2022, take your current benefit, and multiply it by 1.059%.
The increase in Social Security is to counteract the current uptick in the cost of consumer goods. These price increases include essential commodities such as oil and gas. And the expected rise in prices for most goods is 5.9%.
So, by understanding how COLA works, the likely outcome in the foreseen future is a combination of smaller Social Security increases, later ages to collect these benefits, and more income tax.
When Social Security Runs Out: What The Program Will Look Like In 2035
The future of Social Security remains uncertain, forcing people to ask questions like, “Will Social Security run out?” According to the 2020 annual report from the board of trustees of the Federal Old-Age and Survivors Insurance Trust Fund and Federal Disability Insurance Trust Fund, Social Security’s income is expected to exceed its expenses this year. The report projects that reserves will be fully depleted by 2035 and annual taxes are expected to cover only about three-quarters of the benefits each year after that.
See what else awaits Social Security in the near future and find out what the program will look like in 2035 — you might want to learn how to stretch your money now.
Also Check: Social Security Office Mcalester Oklahoma
Are Social Security Funds Running Out
The government released a report in August 2021 telling us the Social Security Trust Fund many Americans rely on for retirement funds will run out of money by 2033, one year earlier than previously projected. The disability fund expects to deplete its funds in 2057, which is eight years earlier than was projected in 2020.
These limitations are reported despite a spike in deaths among retirement-age Americans in 2020 which helped keep costs low.
The Treasury Department reports the finances of both programs have been significantly affected by the pandemic and recession of 2020, given the contraction of the workforce during the pandemic and more retirement-eligible people opting to retire early.
To make matters worse, Social Securitys 2022 cost of living increase is anticipated to be the highest in history.
Social Security’s Disability Program Is In Worse Financial Shape Than The Retirement Side
Social Security helps not only retirees but also roughly 9 million of people suffering from disabilities. Unfortunately, the trust fund that covers disability payments is in even worse financial condition than the trust fund that covers retirement benefits. What will happen when the disability program’s trust fund runs out?
In the following video, Dan Caplinger, The Motley Fool’s director of investment planning, talks about the two Social Security trust funds, noting that the latest estimates give the retirement trust fund about 20 more years before it runs out of money, but the disability trust fund is slated to be used up by 2016, just two years from now. Dan notes that if it does run out of money, recipients will only get about 80% of their scheduled benefits, with cuts happening automatically. Dan points out that one simple fix would be to have more Social Security payroll taxes allocated toward disability, but that would only leave the retirement trust fund in worse shape and not provide a long-term fix. Dan concludes that what happens with disability could provide answers on what politicians will do with the retirement side of Social Security decades from now.
Recommended Reading: How Long Does It Take To Get Social Security Disability
How To Get A Social Security Card
How Do Benefits Work And How Can I Qualify
While you work, you pay Social Security taxes. This tax money goes into a trust fund that pays benefits to:
- Those who are currently retired
- To people with disabilities
- To the surviving spouses and children of workers who have died
Each year you work, youll get credits to help you become eligible for benefits when its time for you to retire. Find all the benefits Social Security Administration offers.
There are four main types of benefits that the SSA offers:
Learn about earning limits if you plan to work while receiving Social Security benefits
Reasons Why People Think Social Security Will Run Out
Social Security has become a hot button political topic in the past few decades. Some even call it the third rail of American politics, implying that to dare touch the program means certain political death. One of the major reasons its such a big deal is that some people think the money to fund the program is going to run out and leave tomorrows seniors, who are paying into the system now, out in the cold.
People believe the program will run out of money for many reasons, including:
While Social Security is unlikely to run out, that doesnt mean the government wont need to take some steps to protect the security of the program in the coming years. Steps could include raising the age at which you can begin to receive payments or increasing the payroll tax that pays for Social Security.
Annual Reports By The Trustees
Each year, starting in 1941, the Social Security Board of Trustees has presented a required report on the financial status of the program to the Congress. The board has six members, including the Secretary of the Treasury as the managing trustee, the Secretary of Labor, the Secretary of Health and Human Services, and the Commissioner of Social Security, plus two public trustees appointed by the president and confirmed by the senate.
The Social Security Act requires that the annual report include the financial operations of the trust funds in the most recent past year, the expected financial operations of the trust funds over the next 5 years, and an analysis of the actuarial status of the program. The recent financial operations and the operations projected for the next few years are a finger on the pulse of the program. The actuarial status of the program is intended to provide an early warning of any potential longer-term financial issues or challenges that will be facing the program.
But Wait I Funded These Programs With Taxes This Is My Money
Yes and no.
Yes, you paid into the program, but Social Security is not a retirement savings program. Its more like a pension. The people paying in now through payroll taxes are paying for todays retirees. When you retire, younger workers will be paying it forward for you.
And, in fact, you probably have paid less in taxes than you are going to get out in benefits. According to a 2020 report from the Urban Institute:
- A single male who retired in 2020 with a high earning history will have, on average, paid a total of $629,000 in taxes to Social Security and Medicare and is expected to get $678,000 in lifetime benefits.
- A married couple who retired in 2020 with one higher earner and one average earning history will have, on average, paid a total of $1,021,000 in taxes to Social Security and Medicare and is expected to get $1,358,000 in benefits.
Of course, the above analysis ignores the time value of money and lost opportunity cost. Social Security contributions are put into the fund over decades, not all at once. Funding Social Security this way takes the risk away from accumulating benefits, but it also hampers growth opportunities.
Actuarial Status And Budget Scoring
The requirements in the law for the annual report of the Social Security Board of Trustees are specific on the nature of the analysis that is desired. Although the OASDI program is highly dependent on the trust fund assets for solvency, and these assets are held in Treasury securities, the assessment of the actuarial status of the program is separate from direct consideration of implications for the federal government budget.
An additional important distinction in trust fund versus budget scoring is the assumption about current law. In the trustees report, careful distinction is made between the cost of the programreflecting scheduled benefits, and the actual expendituresreflecting the benefits that would be payable subject to the limits imposed by the inability of the trust funds to borrow. If the trust funds ever become exhausted, expenditures thereafter would be limited to the amount of continuing tax income. It is projected in the 2009 Trustees Report that only 76 percent of scheduled benefits would be payable and could be paid at the time the trust fund is exhausted in 2037. This limitation not only places an absolute braking force on the spending that is possible by the OASDI program, but also forces Congressional action before exhaustion of the funds.
Read Also: Social Security Office In Madison Tennessee
How Are Social Security Benefits Determined
Workers become eligible for Social Security benefits for themselves and their family members by working and paying Social Security taxes. Generally, a worker must have 10 years of employment to be eligible for retirement benefits. Disability benefits depend on the workers earnings before disability and the workers age at disability.
A workers initial monthly benefit under the OASI program is based on their average indexed monthly earnings during the 35 years in which their earnings were highest.1 Benefits are calculated using a progressive formula that provides a higher replacement rate for workers with lower earnings.2 In 2021, a worker who retired at age 66 with $26,400 in career-average earnings would receive Social Security benefits that replaced 57 percent of her pre-retirement earnings. By contrast, Social Security benefits to workers earning $59,000 would replace only 42 percent of their career-average earnings.
Full benefits are payable at the normal retirement age, which is between 65 and 67, depending on ones birth year. Early retirement is possible at age 62, but benefits would be subject to a permanent reduction. Similarly, if retirement is delayed, benefits would be higher when they go into effect. However, nearly half of retirees claim their benefits as early as possible, and about 90 percent of them claim benefits before their full retirement age.
How To Stop Social Security Check Payments
The SSA can not pay benefits for the month of a recipients death. That means if the person died in July, the check received in August must be returned. Find out how to return a check to the SSA.
If the payment is by direct deposit, notify the financial institution as soon as possible so it can return any payments received after death. For more about the requirement to return benefits for the month of a beneficiarys death, see the top of page 11 of this SSA publication.
Family members may be eligible for Social Security survivors benefits when a person getting benefits dies. Visit the SSA’s Survivors Benefits page to learn more.
Recommended Reading: Medicare Deduction From Social Security 2022
Is It Likely That Benefits Will Be Cut
Some experts doubt that a big slash in Social Security benefits is forthcoming.
The ramifications of that event would be beyond traumatic for everyone in the country, said Joseph E. Roseman Jr., a Social Security expert and retirement planner at Retirement Capital Planners. Youve got a national disaster on your hands.
Thats why he thinks Congress will step in before 2035 to prevent such a deep cut in benefits. Mary Beth Franklin, a Social Security expert and contributing editor for Investment News, agrees that a big cut in benefits is unlikely.
As pensions are disappearing, people are relying more on Social Security, she said. Because of the programs popularity, politicians wont want to tinker with benefits for existing retirees and will likely have to find other solutions to the trust fund shortfall.