By Marjorie L. Rand, CPA, CFP®, RICP®
The news surrounding Social Security isn’t pretty. Three-quarters of people over the age of 50 expect the program to run out of money in their lifetime. Around 40% of younger generations (like Gen Z and Millennials) believe they will not receive a single penny from the program.
This prevailing sentiment stems from alarming reports and headlines warning of the imminent depletion of the Social Security Trust Fund. Such narratives paint a bleak picture of the future, where hard-earned benefits might be severely curtailed or—worse—vanish entirely.
Yet, it’s crucial to dig deeper, beyond the headlines, and understand the underlying mechanisms and challenges the program faces. While there is certainly work that needs to be done, I don’t think you should believe all hope is lost, or that the program will go away entirely. Social Security is one component of retirement, but it’s not the only thing you should be planning for.
Let’s delve into the complexities of Social Security, discuss potential solutions, and provide insights on how you can tailor the future of the program to your benefit.
Concerns about Social Security’s Sustainability
The fears about Social Security are not unfounded. According to the most recent Social Security Trustee report, the Social Security Trust Fund will be completely depleted by 2034, one year earlier than previously thought.
With that said, does that mean that no benefits will be paid out after that point? No, not at all.
Currently, Social Security benefits are paid for via a combination of distributions from the trust fund, as well as payroll taxes. If the trust fund were depleted by 2034, then payroll taxes would be able to cover approximately 77% of Social Security benefits.
If that were to happen, with no changes to the program in the meantime, then people receiving Social Security benefits would experience a pretty significant pay cut. While neither I (nor you) have a crystal ball, my guess is that we’re far more likely to see changes to the program, as opposed to a 23% pay cut that would hurt all the retirees in this country.
How Social Security Might Cover the Shortfall
At its core, the challenge of maintaining the solvency of Social Security boils down to two relatively simple strategies: raise more money (by increasing taxes) or cut benefits. Will we need to do one of these strategies entirely? Probably not. Most likely it will be some kind of compromise. But here are a few ideas that have been brought forth as solutions to fund the gap we’re facing:
- Increase Payroll Tax Rate: A proposal to raise the payroll tax rate from 12.4% to 13.4% offers a significant potential to bridge the financial gap. This moderate increase, shared between employer and employee, could help cover 28% of Social Security’s solvency gap and reduce 23% of its structural deficit.
- Adjust the Taxable Maximum: Presently, only wages up to $147,000 are subject to Social Security tax. By either increasing this cap, eliminating it, or introducing a tax on higher earnings tiers, the system’s shortfall could shrink. Depending on implementation, such adjustments could tackle up to 68% of the solvency shortfall.
- Increase Tax on All Social Security Benefits: By taxing more Social Security benefits and redirecting those funds back into the program, an additional revenue stream is created. As of now, only benefits exceeding certain income thresholds are taxed, up to 85% of the benefit amount. Revising this could generate substantial revenue, though it may face challenges due to its unpopularity among retirees.
- Raise the Retirement Age: The concept of gradually raising the retirement age addresses the reality of increased life expectancies. The proposition involves extending the retirement age by two months annually until it reaches 69, after which it would be indexed to life expectancy, essentially adapting to shifting demographics. While the early retirement age of 62 would remain unchanged, beneficiaries would need to wait longer to receive their full benefit.
- Reduce Benefits for High-Earners: The strategy behind this is to focus on offering more substantial benefits for lower-income and middle-income earners, and progressively reduce benefits for higher incomes.
- Increase the Number of Earning Years for Benefit Calculation: Currently, Social Security determines benefits based on an individual’s top 35 earning years. By extending this time frame to 40 years, the inclusion of additional low- or zero-earning years could reduce the average benefit amount.
When Should You Take Social Security?
Given the potential changes to Social Security in the next decade, making a well-informed decision about when to claim your benefits has become even more crucial. While some people may want to claim as soon as they’re eligible at age 62, often driven by concerns about the program’s solvency, that may not be the best solution. Waiting until full retirement age or beyond can increase your monthly benefits, perhaps substantially. For high-earners particularly, delaying may help mitigate some of the impact of potentially reduced benefits.
Moreover, a number of other factors, like life expectancy, health status, employment opportunities, and other retirement income sources, can help inform this critical decision. And those factors may be just as, or even more important, than the potential changes that are made to Social Security.
It’s essential to personalize this choice based on your unique circumstances, possibly with the assistance of a financial advisor, to maximize your lifetime benefits and help you enjoy your retirement.
Prepare for Life’s Transitions
Navigating the intricacies of Social Security, especially in light of all the bad news surrounding the program, can be a tough task. It requires an understanding of the issues at hand, a level head to make a solid decision, as well as knowledge of the other issues retirees face.
At Rand Financial Planning, we know that not everyone wants to go down that road by themselves. That’s why our main mission is to help you plan for the big life transitions with as little stress or worry as possible. If you’d like to see if we can help, we’d be happy to speak with you. You can schedule a 20-minute introductory call or reach out to me at 908-895-2406 or firstname.lastname@example.org to see if I’m the right fit to help you on your financial journey.