As the cornerstone of retirement planning for most American workers since 1935, Social Security was intended as an income supplement only. Yet longer-term sustainability is in doubt as demographic shifts and economic challenges pummel the system. This article reviews where the Social Security program stands today and in years to come, as well as explores what — if any — changes should be factored into planning retirement.
The Current State of Social Security
As it stands, Social Security is mostly paid for by payroll taxes from workers who support current retirees. In 2023, the program will benefit over 65 million American retirees, disabled workers, and survivors of deceased workers.
But there are huge problems with the system
Changing demographics: The mass retirement of Baby Boomers has brought more beneficiaries for every worker.
Increased life expectancies: Americans are collecting on their benefits longer.
Declining birth rates: The younger cohort of workers in the workforce will be expected to support an increasing number of retirees.
Economic uncertainty: Variables such as wage stagnation or an economic downturn can influence payroll tax revenues.
Projections for the Future
The Old-Age and Survivors Insurance (OASI) Trust Fund, which pays retirement and survivors benefits, is now expected to be able to pay scheduled benefits on a timely basis until 2033. Thereafter, tax revenues coming in will only cover 77% of the benefits that have been promised.
We should note that this does not mean Social Security is “running out of money,” or will disappear by 2033. But without changes to the law, cuts in benefits will have to be made.
Potential Reforms
To deal with the financial challenges of Social Security, policymakers have proposed countless reforms.
Current solutions make problems worse also Increasing the payroll tax rate – this would add money to the system but may not be popular with workers, employers
Lifting or abolishing the payroll tax cap – right now, income above $160,200 (as of 2023) is exempt from Social Security taxes. Lifting or abolishing this cap could generate substantial revenues.
Raising full retirement age: Raising the age at which retirees can claim their benefits in full could factor in increased longevity.
Tweaking the benefit formula: Making changes in how benefits are determined could also cut costs, though this may draw objections from people on or near retirement.
Means-testing benefits – cutting back on benefits for higher-income retirees to preserve the system for those most in need.
Implications for Retirement Planning
With Social Security’s future up in the air, people must adapt their retirement planning approach.
Save beyond Social Security: While it will likely prove to be a component of your retirement future, it probably won’t do the same heavy lifting that we’ve seen in prior generations. It stresses the importance of diversifying retirement income sources.
Save more on your own: Bolstering retirement savings in 401(k)s, IRAs, and other accounts can help cushion any Social Security benefit cuts.
You could even postpone your retirement: Deferring the date at which you start collecting Social Security can increase benefits and extend the time to save.
Stay up-to-date: Monitor potential Social Security updates and plan for any changes on the horizon.
Diversify your income: Rental properties, part-time work, or starting a small business may give you extra money for retirement.
Get the most from Social Security: Knowledge of when and how to claim your full or partial benefit, including one idea that could add hundreds of dollars more a month you never considered.
Take into account healthcare costs: Given possible changes to Medicare and the trend of increasing healthcare costs, planners must consider these expenses.
The Role of Financial Education
As the retirement landscape changes, personal finance skills grow even more relevant. Better educating individuals on retirement planning for employers, financial institutions, and government agencies including:
The fundamental concept behind the Social Security program and how benefits are determined
These Vs Those 6 – Your revenue and savings/planning
Retire income and expense management Tricks
Longevity risk – where this leaves us
Conclusion
The fate of Social Security could be unknown, but for the near term at least it seems that it will likely always remain a part of how we consider preparing to stop working. Yet the hardships it faces emphasize why having a gussied-up, detailed retirement blueprint is so critical.
We view Social Security as one part of a well-diversified retirement plan. Evolving Social SecurityWhether or not your ability to rely on social security, by keeping informed and growing personal savings and tapping into other income streams, Americans can make strides towards a more stable retirement.
As a result, policymakers are in the unenviable position of having to reform Social Security so that it lasts for generations without cutting benefits more than should be done. While discussions of any potential changes continue, it is important to remain actively involved and adjust your retirement planning strategy accordingly.
In the end, retirement security in America will require some changes on all three fronts: personal responsibility for one’s future; a solid public policy that provides a clear path to prosperity and independence for everyone who can make it there; and an understanding enough of what we face collectively about Social Security so as not stop anything from reaching its full potential. If people are prepared for the worst possible outcomes, and don’t let their confidence influence them too much one way or another in any given direction, they’re more able to place themselves on track towards a secure retirement future.