The media is filled with dire predictions about the future of Social Security. If you’re a millennial, you may be worried that the Social Security System will go broke soon and leave you with a bleak retirement. Although you love your baby boomer parents, you don’t want them to leave Social Security insolvent.
Public debate about whether Social Security is insolvent or not is a good thing. With 17 active proposals in Congress, the Social Security funding problem will be solved. The government is well-aware that legislation must be approved to keep Social Security solvent.
Will Social Security go broke if no action is taken?
According to the last 5 Social Security Trustees Reports, the Social Security Old-Age, Survivors, and Disability Insurance Trust Fund (OASDI) reserves will be depleted between 2033 and 2036 if nothing changes. In other words, if there is no legislative action, the projected tax receipts will be able to pay approximately 75% of Social Security benefits after the trust fund is exhausted. So, in the absolute worst case scenario, if no legislation is passed within the next 20 years, there will be tax revenues to cover the majority of Social Security liabilities. But this ‘worst case scenario’ is not going to happen.
As one of the most important government benefits, it is extremely unlikely that Social Security will go broke - now or in the future.
What are the plans to fix Social Security?
The Social Security program is being fixed now. There are many proposals currently under consideration and there’s sufficient time to enact whatever measures are necessary to keep Social Security solvent. Following are some of the more popular proposals being considered to keep Social Security from going bust.
1. Increasing the full retirement age. Social Security benefits aren’t a fixed amount per month that never change. The old age benefit varies based upon the age at which the recipient begins to collect their annuity. The full retirement age is the point at which you can collect your full, not a reduced benefit.
The full retirement age is already increasing. In 1983, the full retirement age began increasing from age 65. Full retirement age is currently 66 and will gradually climb to age 65 for those born in 1960 and after. This makes perfect sense, as our lifespans are increasing. According to the National Institute on Aging, most babies born in 1900 died before reaching age 50. Contrast that with babies born today who have a life expectancy in their 80’s.
One proposal recommends the full retirement age increase to age 68. This option would start in 2023, increasing two months each year until it reached a full retirement age of 68 in 2028. Experts predict that this action alone would eliminate 60% of the funding gap.
2. Implementing longevity indexing. When Social Security was first created in the 1930s, women were expected to live to age 62 and men to age 58. At that time, Social Security benefits were paid to older Americans for a very short period of time. Since we’re living so much longer, longevity indexing would adjust payments to account for the longer lifespans. In other words, the longer you lived, the smaller your benefit. This option has its detractors, since those who live the longest are typically the wealthiest, so you’d be cutting benefits for all to help out the healthier Americans.
3. Adjusting the Cost-of-Living (COLA) calculation. Social Security benefits are indexed to the cost-of-living, according to the consumer price index. This measures a basket of goods and services and then calculates the percentage increase in price. One issue with the COLA calculation is that the items listed in the basket may or may not pertain to a specific individual. If you don’t drive, then all related automobile expenses are irrelevant to you. If you live in one part of the country, your cost of living will vary from other areas.
One Social Security proposal suggests using a different index to create the COLA adjustments, that might better fit the expenses of the elderly. Another option is to use a COLA formula which would deliberately decrease this annual percentage.
4. Increasing the payroll deduction. At present, Social Security payroll tax is collected on all earnings up to $118,500. Any wages in excess of that amount aren’t taxed by Social Security. Although the cap usually goes up annually along with the national average wage, the cap only covers about 83% of total national earnings. If the cap were raised and covered 90% of the total American populations’ earnings, then approximately 29% of the Social Security funding shortfall would be eliminated.
Another solution recommends eliminating the payroll tax cap completely. This solution is projected by experts to satisfy 71% of the future unfunded Social Security obligations.
5. Reducing benefits for the wealthy. There are a variety of strategies under consideration to implement this option. One idea is to cut benefits for the highest-earning 25% of the population. Another alternative broadens this approach to include benefit reductions for the highest-earning 50% of the population. Although this approach seems plausible in theory, this proposal could cut benefits for middle-class workers earning as little as $40,000 per year.
6. Increasing the payroll tax. At present, employees and employers each pay 6.2% of the employee’s salary to Social Security (up to earnings of $118,500). Self-employed folks pay 12.4%, both the employer and employee amounts. There is conversation about raising both the employer and employee’s percentage to 6.5%. Other proponents of this approach recommend increasing the Social Security tax up to 7.2% between 2018 to 2023. This change is projected to fill approximately 20% of the Social Security funding gap. There’s some pushback on this idea as Americans and their employers already feel they’re suffering from present tax obligations.
How can you protect yourself from complete dependence on Social Security?
Although many retirees depend on Social Security as their entire incomes in old age, it was not designed to fulfill this purpose. Social Security wasn’t supposed to serve as your entire source of income for decades of life. For many years, retirement income was provided by companies and governmental employers who paid their workers a pension after years of service. Although still in practice, this retirement benefit is becoming less available.
As pensions declined, the government created other means for employees to fund their own retirements. The Individual Retirement Account (IRA), began in 1974 as the result of the Employee Retirement Income Security Act (ERISA). The original IRA deduction limit was $1,500 per individual per year and let workers contribute, pre-tax, this amount to an account which could grow without being taxed until retirement.
The 401(k) plan was actually invented by accident in 1980 when Ted Benna, a benefits consultant interpreted the law and created a 401(k) plan for The Johnson Company, his own employer. Today, most employers who want to recruit and retain qualified workers offer a 401(k) plan. Employees, with access to a 401(k) plan, especially one that offers matching benefits, are wise to contribute as well.
The tides have shifted over the years. Neither the government nor your employer are solely responsible for your retirement success. Employers are offering a way to grow your retirement fund with their 401(k) offerings. Smart workers understand that even if Social Security doesn’t go bust, they must contribute to their future retirement as well.