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. “You’ve got a national disaster on your hands.”
That’s 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 program’s popularity, politicians won’t want to tinker with benefits for existing retirees and will likely have to find other solutions to the trust fund shortfall.
Why People Think Social Security Will Go Bankrupt
So why does this myth about Social Security persist? One reason may be the way the popular press covers Social Security news, using the programs name as shorthand for its trusts.
To wit: The Social Security Board of Trustees put out a press release for its 2021 annual report on the long-term finances for the Social Security trust funds. The headline stated Combined Trust Funds Projection Depletion One Year Sooner Than Last Year.
Specifically, the report stated that the Old Age and Survivors Insurance Trust Fund, which helps pay the benefits for current retirees , was scheduled to be depleted in 2033, a year earlier than was believed the year prior.
Yet in a on their write-up of the report, the New York Times began Social Security will be depleted in 2033
Social Security will not be depleted in 2033the OASI Trust Fund would be. And should that happen, retirees would still receive approximately 76% of their benefits.
Thats because your monthly check is paid for by the payroll taxes of current workers as well as from the trust. In other words, as long as there are Americans working and paying taxes, Social Security will continue to pay out benefits, even if theyre somewhat reduced from current levels.
Demographic Changes Mean More Retirees Fewer Workers Paying Payroll Taxes
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The Social Security Act became law with U.S. President Franklin D. Roosevelt’s signature on Aug. 14, 1935. But it would take more time for the Social Security program to turn into the mainstay of the U.S. social safety net.
Created as a contributory old-age insurance scheme with limited and phased-in benefits for retirees, Social Security extended benefits to survivors of beneficiaries by 1939, to farm and domestic workers as well as the self-employed in 1950, and to the disabled in 1957. Meanwhile, Congress postponed planned payroll tax increases during the program’s early years.
The pattern favoring political expediency over the system’s long-term solvency persists. With payroll taxes no longer fully covering the benefits paid out, Social Security’s cash reserves are projected to run out by 2034, subjecting recipients at that time to a reduction in benefits of more than 20% without a legislative fix.
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What Social Security Would Look Like In 2035 With This Change
An increase in the payroll tax rate could take different forms. Currently, the total payroll tax is allocated equally between the employee and the employer. The projected tax increase of 3.14% could be allocated equally among employers and employees or allocated more to the employer to hide the tax hike from taxpayers.
A legislative proposal called the Social Security 2100 Act from Rep. John Larson favors an equal split. It would raise the Social Security tax rate to 7.4% for both the employer and the employee. The bill has gained some support but so far has stalled in Congress, Politico reported.
Why The Social Security Trust Fund Is Running Outand Why It Needs To Be Protected
In the almost 90 years that Social Security has paid out funds to older Americans, seniors have had confidence that the program would be there for them. Payroll taxes have more than covered the benefits paid to seniors. And extra income the program brought in was deposited into the Social Security trust fund to ensure that future generations would be able to depend on their benefits as well.
However, the reality is beginning to look grimaction is needed to ensure that seniors will receive the benefits they deserve.
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Ways To Balance Social Securitys Budget
Even though Social Security isnt expected to run out of money until 2034-35, several options for changes have already been floated to deal with the budget shortfall. These options include:
- Raising the payroll tax rate
- Increasing the wages subject to Social Security taxes
- Raising the full retirement age
- Reducing the annual cost-of-living adjustments
- Cutting benefits
Read on to learn more about the details of each of those proposals and how they would affect Social Security if implemented.
Social Security Trust Fund To Run Out By 2034 Report Says
Social Security wont be able to pay full benefits by 2034, one year earlier than projected last year, unless Congress acts to address the programs finances, according the annual report released last week by the Social Security and Medicare trustees. The report finds that, in 13 years, the combined Social Security trust funds for retirement and disability will only be able to pay out 78% of benefits. The Old-Age and Survivors Insurance Trust Fund, which pays retirement and survivors benefits, is expected to be depleted by 2033, also a year earlier than reported last year.
The Medicare Part A Trust Fund, which pays inpatient hospital benefits, will be depleted by 2026, the same as last year, according to the report. At that point, the program would be able to pay 91% of benefits.
The quicker Social Security depletion reflects the coronavirus recession and the resulting drop in payroll tax income and taxation of benefits. The report also projects higher mortality related to Covid-19 through 2023 and short-term delays in births and immigration.
The report says that Social Security could be made solvent for 75 years via a 3.36 percentage point increase in payroll taxes today, but if lawmakers wait until 2034, a 4.2 percentage point increase would be needed. Similarly, a 21% cut in benefits today would make the program solvent over the long-term, but a 26% cut would be needed if lawmakers wait until 2034.
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The Social Security Trust Fund Depletion
The other expected change on Social Security is that the trust fund is estimated to deplete by 2033, an entire year sooner than initially expected. The depletion is due to many factors, such as COVID, an aging population, more people dying than being born, and more money being withdrawn than being contributed. Another reason for our trust fund rundown is our governments propensity to beg, borrow and steal from it over the past few decades.
What Congress Can Do To Help Social Security
As the branch of government responsible for enacting and amending laws, the US Congress must act soon to address the funding shortfalls of the Social Security program. The Social Security Trusteeâs report noted that further delays to address the crisis could compress the shortfall into fewer years.
Some of the policy options that Congress has at its disposal include increasing the Social Security tax rate, increasing the wage base, extending the retirement age, changing the cost of living adjustment, adding a means-tested component for benefits, or a combination of interventions that increase taxes and reduces benefits.
Still, American workers should not rely solely on Social Security for their retirement income. Investing in other retirement options like 401s, IRAs, and Roth IRAs can help retirees create multiple streams of income.
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The Full Retirement Age Could Increase
Because tax hikes aren’t popular, Congress will more likely raise the full retirement age for Social Security benefits, Roseman said. That means younger generations will have to work longer before they can start collecting benefits.
Currently, the age at which you can collect full retirement benefits ranges from 65 if you were born in 1937 or earlier, to 67 if you were born in 1960 or later.
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.
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What You Can Do To Prepare
While the ball is in Congresss court on Social Security funding, individual recipients can take some action steps of their own to maximize their Social Security earnings down the road.
One of the most important things is to start planning early, Ryan said. Its never too early to start thinking about retirement and how you will generate income during that time.
Make sure youre contributing to a retirement account such as a 401k or IRA to build a sturdy retirement savings platform outside of Social Security. The sooner you start saving, the more time your money has to grow, Ryan noted. Employers often offer matching contributions, so its important to take advantage of that if possible.
Another route to financial security in retirement is playing your delay card.
If you believe that Congress will indeed keep the Social Security system from cutting benefits, then delaying taking benefits until age 70 is the best strategy for many people, Carey said. Theres a break-even life expectancy where delaying taking Social Security makes sense.
That age is 80 for most people. Consequently, if you think youll live past age 80, it could make sense to delay taking Social Security. This break-even occurs because those who delay until age 70 receive a 24% higher payment, Carey added.
Additionally, many couples might not know their spouse can receive half of their full retirement age benefits.
How To Reduce Longevity Risk
Determining how much is enough to live on in retirement shouldn’t be an educated guess. Instead, crunch the numbers and enlist a financial planner if necessary to get a realistic idea of how much money you’ll have and how much you may still need to save for retirement if you’re not quite there yet.
If you worry that “happily ever after” won’t last throughout retirementat least financiallythere are some things you can do now to reduce longevity risk.
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Ficas Impact On Social Security
FICA stands for the Federal Insurance Contributions Act and is the dollar amount deducted from each paycheck. Your nine-digit Social Security number helps accurately record your covered wages or self-employment. As you work and pay FICA taxes, you earn credits for Social Security benefits.
With the expected increase in the cost of living, the limits on the income subject to FICA taxes are naturally increasing. In 2021 you were taxed on your first $142,800 in income to help fund Social Security. But with the almost additional 6% COLA for 2022, the government is increasing taxable FICA wages to $147,000 next year.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
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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.
Consider A Reverse Mortgage
If you’re over age 62 and need extra money to cover medical expenses or pay off your mortgage, you might consider a reverse mortgage. A reverse mortgage works by converting part of the equity in your home into cash. Instead of paying monthly mortgage payments, you get an advance on a portion of your home equity as a loan.
You don’t have to sell your home, and you still hold the title. The money you receive is typically tax-free. If you eventually want to sell the home, you’ll use the proceeds to pay off the reverse mortgage. If you still own the home when you pass away, your heirs will need to repay the loan or refinance it if they want to keep the home, or sell it to repay the loan.
Reverse mortgages come with drawbacks, however. Over time, the balance of the loan increases, as does the interest associated with the loan. Also, the fees that your lender charges can be higher than with other financial products. You are also still responsible for paying property taxes, utilities, insurance, home maintenance and other home-related expenses.
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Why Are Retirement Payouts Depleting
The accelerated insolvency could be, in part, due to Covid-related unemployment.
Around 14.6million people are currently receiving some form of unemployment assistance, with 5.4% of the population still without a job, and thus not paying towards Social Security.
When baby boomers began to retire a decade ago, the Social Security Administration started paying out more money than it received. That trend has continued as the number of retirees increases.
Its not clear when or how intervention might extend the funding for Social Security payments, but for many Americans, the need is urgent.
Social Security benefits make up 33% of the average retiree’s income.
A yearly cost-of-living adjustment impacts the payouts and a 6.2 percent increase is projected for 2022.
The COLA increase marks the biggest surge in monthly payouts since 1983.
What Is Longevity Risk
Longevity risk is the possibility that you will outlive what you have in your investments, savings, pensions, annuities and other sources of retirement income. As you live longer, your retirement income must stretch out over a longer time period. Factor in inflation and the growing cost of living, and it’s easy to see how you could outlive your nest egg.
Since Social Security started paying monthly benefits in 1940, the average life expectancy for men who reached age 65 in 2022 has increased more than six years to 84.1 years. For women reaching 65 in 2022, life expectancy has increased by about seven years to age 86.7. But that’s the average, meaning there’s a good chance you could live longer than that.
Consider William and Mary, a hypothetical couple using the Social Security average life expectancy rates to determine how to allocate their money in retirement. If William’s life expectancy is 84 years old, he will need to figure out how to make his money last for another 19 years if he retires today at age 65. Mary’s life expectancy is 87. Her money will need to last for 22 years if she retires today at age 65. But that’s only based on average life expectancy rates. If William and Mary both live to be 95, their money will need to stretch out for 30 years from retirement.
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