What is the future of Social Security?
“Will Social Security be around when I retire?”
“Will my benefits be reduced?”
“Is my retirement secure enough to stand on its own, even without Social Security?”
If you’ve asked yourself any of the questions above, you’re not alone. In April, USA Today reported that 51% of pre-retirees (aged 50 to 64), 49% of workers (aged 30 to 49), and 33% of millennials (aged 18 to 29) all express doubt about Social Security.[i]
Americans have good reason to be concerned about Social Security. In 1960, there were 5.1 workers for every Social Security recipient; this ratio fell to 2.8 workers per Social Security recipient in 2013.[ii] This situation will only grow worse over time. An aging population and retiring baby boomers are stressing the Social Security program, as more beneficiaries are supported by fewer workers.
What is the future of Social Security, and how can you protect yourself and your family?
Facts behind Social Security
The cost of Social Security is on the rise. While expenses equaled 4.9% of U.S. GDP (Gross Domestic Product) in 2017, they’re expected to jump to 6.1% by 2038. For 2018, the program’s outflows are expected to exceed inflows for the first time since 1982. As discussed above, an increase in Social Security recipients as baby boomers retire, coupled with a smaller workforce from the lower birth rates over the last few generations, are driving up costs. These higher expenses will stress the Social Security program and cause it to start drawing down reserves in the OASI (Old-Age and Survivors Insurance) Fund. By 2034, the Social Security Administration projects that this Fund will be entirely depleted.[iii]
Social Security benefits are funded through a dedicated payroll tax called FICA (Federal Insurance Contributions Act). This tax is 12.4% of earnings up to $128,400 (in 2018). Half is paid by employees, and the other half by employers. Self-employed individuals are responsible for the entire 12.4%.
It’s important to remember that Social Security can’t “go broke.” Because the program is funded by tax revenues, there will always be funds available as long as we have U.S. workers. However, with the ratio of workers to retirees on the decline, tax revenue will be spread thinner. The Social Security Administration projects that dedicated tax revenues will cover around 77% of benefits after 2034.[iii]
Fixing Social Security
Clearly, Social Security needs help. Over the years, lawmakers have made some of the following proposals to help bridge the funding gap:
- Extend full retirement age. While full retirement age was originally 65, it is gradually increased to 67 for workers born between 1938 and 1960.[iv] This solution was implemented in 1983 to address a funding crisis, and a similar solution could be used again. Full retirement age may be extended to 69 or 70 for workers born after 1960.
- Raise the wage limit. As mentioned above, Social Security taxes are capped at $128,400. Any wages above this amount do not face the FICA taxes. If the wage limit were raised or removed altogether, inflows into Social Security would likewise increase.
- Peg benefits to net worth. Many feel that Social Security is a social “safety net” to supplement retirement income of retirees in need. As a result, benefits could be pegged to recipients’ net worth, reducing or even eliminating benefits for individuals with other retirement assets.
- Increase taxes. No one likes paying more taxes. However, by increasing the amount of current income through FICA taxes, the reserves in the OASI Fund can last longer.
- Reduce cost of living adjustments. To insure that benefits are not eroded by inflation, Social Security is indexed to the Consumer Price Index. The COLA (cost-of-living adjustment) was 2.0% for 2018.[v] If the COLA were reduced, total program costs would drop as well.
What should I do to prepare?
While Social Security is in trouble, it certainly isn’t a “Ponzi scheme” or on its “death bed”. As long as the U.S. economy keeps ticking and lawmakers design a workable reform strategy, Social Security will continue for generations.
However, don’t rely on Social Security. The program was intended to supplement, not replace, your own savings. With the increased uncertainty surrounding the benefits that will ultimately be paid, it is crucial to take control of your retirement. Protect yourself and your family through retirement planning to ensure your savings adequately meet your retirement needs, regardless of the future of Social Security.
This material was prepared by Truuwater Financial. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.