As an advisor, I get the question all the time: “Will Social Security still be around when I retire?”. This is especially concerning for millennials and younger generations who have heard their whole lives that the Social Security program would probably be long gone by the time they reach retirement age. It’s also concerning because most companies no longer have the same pensions that many of the older generations depended on. In this article, we will discuss Social Security, the current health of the program, and a few of the most likely reforms.
What are Social Security Retirement Benefits?
For my most retirees, Social Security benefits make a up a significant part of their retirement income. Social Security is essentially a federal pension. Workers in the private sector typically contribute to Social Security through their taxes. For employees, they typically pay a 6.2% tax rate into Social Security and their employer also pays 6.2% on the employee’s behalf. If you are self-employed, you are responsible for paying the full 12.4% Social Security tax rate. These contributions go into a large pool of money called the Social Security trust fund that is invested and managed by the Department of the Treasury. Once you reach retirement you will be entitled to monthly income that will last for the rest of your life. The amount of this income depends on how much you earned while you were working, how many years you worked, and what age you retire at. You can take Social Security as early as age 62 and as late as age 70. The older you are when you take Social Security, the bigger your benefit will be. While this monthly amount is not typically enough to live on by itself, especially in high cost of living states like California, it still can be a solid, dependable foundation of income to retire on.
What is the current health of Social Security?
The health of the Social Security program has become increasingly concerning in recent years. This primarily is due to increased longevity of retirees. When Social Security was launched in 1935, the average life expectancy for Americans was 61, now it is pushing 80! When people live longer and longer and continue collecting Social Security income, this can have the effect of depleting the Social Security trust fund. The most recent US Treasury Report found that the Social Security trust fund is projected to be insolvent by 2033, only 12 years from now! To be clear, insolvent does not mean completely out of money, it means that it will no longer be able to pay the full benefits that are promised. While the trust fund may be in trouble, there is still a ton of money coming into Social Security each year through Social Security taxes. If no reforms are put in place, Social Security is projected to only be able to pay 76% of the current benefits that are promised. While this is certainly not good news, it’s much better than going to zero.
What are the most likely Reforms?
While there are no specific reforms to Social Security currently on the table, it is highly likely that lawmakers will step in at some point with some reforms to ensure that Social Security stays strong. The pay cut looming in 2033 could be disastrous to many retirees, and the long-term health of Social Security is still in question as people continue to live longer and longer. There have been several proposals and ideas on how to reform Social Security. Some of the most likely reforms include:
Increasing the Eligible Retirement Age
Currently, the Full Retirement Age for Social Security is age 67, but you can take Social Security as early as age 62 and as late as age 70. One of the most popular ideas for reform is to push the Full Retirement Age back. This would help combat the increase in longevity that we have seen over the past couple of decades. If you push eligibility for Social Security back, people would pay into Social Security for longer, and take income from Social Security for a shorter period of time, thus helping the health the Social Security trust fund.
Increasing Social Security Payroll Tax Rates
Currently, the Social Security tax rate is 6.2% for employees, and 6.2% for employers (12.4% for self-employed individuals). One reform idea is to increase the Social Security tax rate. This would cause more money to flow into the Social Security trust fund and thus help the health of the program overall.
Increasing the Ceiling on Which Social Security Taxes are Paid
Currently Social Security taxes are only paid on the first $142,800 of reported income. Another popular reform idea is to increase the ceiling on which Social Security taxes are paid. This would make it so that high income earners paid more into Social Security than they are currently paying. This is a relatively popular idea because it would not negatively impact low-income earners who struggle the most, but still could make a very significant impact on the health of the trust fund overall.
Conclusion
While it is true that the most recent reports on Social Security are concerning, there are still several ways that lawmakers can act to keep Social Security healthy. The longer lawmakers wait, however, the heavier the lift will be when they do get around to reform.
For those millennials and younger workers, the health of Social Security is certainly something to keep an eye on. In my opinion, the most likely scenario is that Social Security retirement benefits will still exist when we retire but may look very different than they look today. If we want to ensure that Social Security is still around, we will need to push our lawmakers to keep it a high priority item on their agenda.
The best thing that you can do to increase your chances of having a comfortable retirement is to plan for a retirement without Social Security. This means taking advantage of 401(k)s, IRAs, Roth IRAs and other retirement accounts as early and as often as possible. Then, if Social Security is around when you retire (and it likely will be), it will just serve to make your retirement even more prosperous and secure.
To discuss these ideas further, run Social Security estimates, or plan for a retirement without Social Security, contact a member of our team and we can help you out!
To schedule with Alex, click HERE.
To schedule with Tori, click HERE.
In good health,
Alex