The Future of Social Security: Will it Run Out?
By Andrew J. Tapparo, MSF, RICP®
The news regarding Social Security sustainability is concerning. Seventy-five percent of people over 50 anticipate the program running out of funds in their lifetime, while nearly half of younger generations, such as Gen Z and Millennials, doubt they’ll receive any benefits at all.
Recent discussions have been fueled by eye-opening reports concerning the future of the Social Security Trust Fund. While these stories have cast a shadow, suggesting potential challenges for future benefits, it's important to delve deeper than the eye-catching headlines. Understanding the complexities and challenges faced by the program shows that while there are hurdles, it's far too early to give up hope or believe that Social Security will vanish.
Remember, Social Security is a vital piece of the retirement planning puzzle, but it's not the only one. Embracing a diversified approach to your financial strategy is key to building a robust foundation for your future financial security. This way, you're not just relying on one source but creating a multi-faceted plan that has the potential to adapt and thrive, no matter what the future holds.
Let’s explore the intricacies of Social Security, evaluate potential solutions, and offer insights on how you can navigate and optimize the program’s future to your advantage.
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:
Raise Taxes
1. 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.
2. 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.
3. 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.
Cut Benefits
1. 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.
2. 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.
3. Increase the Number of Earning Years for Benefit Calculation: Currently, Social Security determines benefits based on an individual’s top 35 earning years. Extending this time frame to 40 years could reduce the average benefit amount by including additional low—or zero-earning years.
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.
It is important not to let solvency issues determine when you claim your benefits. For example, if you assume there will be a 20% benefit cut in the future and use that as an excuse to claim your benefits early, you are focusing on the wrong part of the equation. Do not focus on the part that’s being taken away. Instead, focus on the part that is left. 80% of a higher benefit claimed at 70 is more than 80% of a lower benefit claimed at 62. If you truly believe benefits will be cut, you should try to maximize your benefits so more will remain after the cut.
Moreover, several 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 Your Future Today
Understanding the complexities of Social Security can feel daunting to say the least. Making sound decisions for your future requires that you become aware of the relevant issues while having an understanding of other challenges that you may encounter in retirement.
At Tapparo Capital Management, we understand that not everyone wants to tackle this journey alone. That’s why our primary goal is to assist you in preparing for these big life transitions with minimal stress or anxiety. If you’re interested in exploring how we can support you and navigate Social Security and retirement together, we’re here to have a conversation. To schedule a “Get Acquainted Call” to see if we are a good fit for each other, call 978-887-1121 or email andrew@tapparocapital.com.
About Andy
Andrew Tapparo is a fee-only financial advisor at Tapparo Capital Management, a financial planning firm in Topsfield, MA, helping clients turn their savings into a retirement income that lasts. Inspired by the quote, “Choose a job you love, and you will never work a day in your life”, Andy founded Tapparo Capital Management in 1997 with a passion for helping clients enjoy a truly worry-free and fulfilling retirement and experience financial freedom. As a Retirement Income Certified Professional (RICP®), he designs retirement strategies along with sound money management to help clients retire with confidence.
Andy holds a Bachelor of Science in Industrial Engineering from Rochester Institute of Technology in Rochester, New York, and a Master of Science in Finance from Bentley University in Waltham, Massachusetts. Specializing in retirement income planning, Andy completed a comprehensive financial industry education program at The American College of Financial Services and was awarded the Retirement Income Certified Professional® designation. He is frequently quoted in the media as a financial expert.
Andy and his wife, Susan, live in Topsfield, Massachusetts, and have two beautiful daughters. Outside of work, he is an automobile enthusiast, enjoys taking road trips, and loves the Outer Banks of North Carolina. In his spare time, he volunteers with the local high school varsity girl’s basketball team as the team statistician and runs the team’s website. He is passionate about supporting charities that serve our veterans and their families. To learn more about Andy, connect with him on LinkedIn.