The Future Of Social Security: How To Prepare For Change
Chad Waddoups is the Vice President of Wealth Management at Mountain America Investment Services.
It seems like every few years questions about Social Security’s longevity resurface, sparking fresh concerns for Americans planning for retirement. “Will my benefits be reduced?” “Will the trust funds exist when I retire?” “Will I need to abandon my financial dreams?”
Asking such questions is understandable—after all, you paid into the system and deserve to reap the benefits. Whether you will receive your due becomes less clear during times of economic uncertainty or governmental change. Recent government proposals may have brought the issue back to the forefront, but concerns about Social Security’s long-term viability date back to the early 1980s.
The good news is that the government has managed to keep Social Security running for the last 40 years by making various modifications to the system. Our current administration has reiterated its stance on maintaining the program. There is also a groundswell of public support—over 70 million people rely on Social Security to help fund their retirement—which makes eliminating the program extremely difficult.
Still, it’s wise to be prepared for any eventuality. Read on for a deep dive into Social Security and what strategies I as a finance professional recommend.
How Does Social Security Work?
Social Security is a straightforward system that has served Americans for nearly 100 years. Workers contribute a percentage of their wages through payroll taxes (currently 6.2%), and employers match that contribution. If you are self-employed, you pay the full 12.4%. These contributions then flow into trust funds, which are invested in Treasury bonds.
Upon retirement, workers can start drawing benefits from these funds based on their earnings history and the number of credits they have. Each year of work is worth four credits. You need at least 10 years of work to qualify for benefits, and your benefits amount is based on your highest 35 years of earnings.
Why Are People Worried About Social Security?
For the first 30 to 40 years after Social Security was established, incoming taxes equaled or exceeded outgoing benefits. However, starting in the 1970s and 1980s, demographic shifts began changing this balance. Today, more money goes out to beneficiaries than comes in through payroll taxes. This is, in large part, due to the sizeable Baby Boomer generation reaching retirement age and smaller generations replacing them in the workforce.
How Long Will It Last?
Each year, the Social Security Administration releases projections about the trust fund’s future. Current estimates predict the fund will be depleted by 2033 if no new revenue enters the system.
This doesn’t mean Social Security will disappear entirely. Payroll taxes will continue flowing into the system, albeit from a smaller group of workers. These incoming taxes would cover approximately 77% of scheduled benefits. This means that beneficiaries would face a reduction of roughly 20% to 25%.
What Are The Potential Solutions?
Several approaches could help maintain retirees’ Social Security income. Currently, the Social Security Administration is looking for ways to eliminate fraud and abuse. This could help stretch existing resources further without requiring major changes. However, it’s unclear if the recovered amount would be significant enough to sustain the system over the long term.
Another option being considered is the reduction or elimination of taxes on Social Security benefits. Beneficiaries now pay taxes on up to 85% of their Social Security income. Lowering that figure would put extra money in beneficiaries’ pockets, but it would also shorten the trust funds’ longevity since those taxes would no longer flow back into the system.
The government could also consider increasing the payroll tax rate from 6.2%. This would generate additional revenue for the trust funds, as well as address income shortfalls since more money would come into the program.
The last option I can envision is increasing the full retirement age. This was done previously during the Reagan administration, moving up from 65 to 67. Increasing the age again could help account for longer life expectancies and reduce the number of years benefits are paid.
How Do You Prepare For Change?
With the cost of living increasing and Americans looking at spending more years in retirement, the burden of saving for and potentially producing an income in retirement falls much more to individuals. It’s crucial to take proactive steps to conserve your retirement finances.
Be more diligent about putting money aside in an employer-sponsored 401(k) plan, especially if your employer offers matching contributions. If you don’t have a 401(k), maximize IRA contributions instead.
You may also need to work longer or transition to a lower-stress position after traditional retirement. This can include driving for a ride-hailing service or working as a crossing guard. The additional income can help supplement Social Security benefits.
Finally, consider making sacrifices—maybe you don’t need a new car right now, or you can hold off on a vacation. Cutting out some luxuries today may provide additional security after retirement.
Is It Too Late To Start?
For those who haven’t begun saving for retirement, I can’t overemphasize the importance of meeting with a financial advisor. It’s an overused analogy, but the best time to plant a tree was 20 years ago. The next best time is today. While saving becomes more challenging closer to retirement, a professional guide can go through the numbers with you and create a plan that works for your unique goals.
You should also visit the Social Security Administration’s website, ssa.gov/myaccount, to review your earnings records and projected benefits. This can help you identify any gaps you’ll need to fill with personal savings.
The key to moving forward with confidence is focusing on actionable steps instead of scenarios beyond your control. Maximize current savings, understand projected benefits, and create comprehensive plans. This provides a clear path toward retirement regardless of Social Security’s future changes.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Consult your advisor prior to investing.
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