April is National Social Security Month. With the future of Social Security in peril, proper planning will become increasingly important for Americans seeking a financially secure retirement.
By Richard W. Stout III and Thomas Britt
Social Security has long been a key component of the American retirement. In fact, 97% of older Americans (aged 60 to 89) either receive Social Security benefits or will receive benefits, according to data from the Social Security Administration (SSA). And many of these beneficiaries have no other retirement savings at their disposal.
Unfortunately, a recent report from the SSA finds that retirees will only receive 78% of their full benefit beginning in 2034 if Congress doesn’t address the program’s funding issues. As the future of Social Security hangs in the balance, proper retirement planning will be critical for Americans who hope to stop working one day.
How Social Security Works
In the United States, Social Security is funded through payroll tax deductions. Both employers and employees contribute to Social Security.
Currently, employees contribute 6.2% of their income, and employers pay an additional 6.2% for each employee. Self-employed individuals pay the entire 12.4% payroll tax. In 2022, payroll taxes apply to up to $147,000 of a taxpayer’s annual income.
When you pay Social Security tax, you aren’t paying into an individual account that’s designated for your retirement. Instead, taxpayers contribute to a Social Security Trust Fund that pays the benefits of all current beneficiaries. That means there’s no guarantee the money you contribute to Social Security will be there for you when you retire.
The status of the Trust Fund depends on the worker-to-beneficiary ratio. When this ratio is healthy, the amount of money the SSA collects through payroll taxes exceeds the amount of money it pays out in benefits. However, there’s likely to be a funding problem when beneficiaries exceed workers.
Why the Future of Social Security Is Now Uncertain
The Social Security Trust Fund hasn’t always had funding issues. In 2020, for example, an annual surplus of $10.9 billion increased reserves to $2.91 trillion, according to the SSA.
However, the outlook for Social Security has worsened since the 2020 report. Over the next decade plus, the SSA will need to draw down its reserves as a decreasing number of workers pay for an increasing number of beneficiaries.
The future of Social Security is uncertain largely because there’s been a steady decline in the birth rate in recent years. In fact, U.S. Census data shows that the number of U.S. births has been declining every year since 2008 (except for 2014). At the same time, the average lifespan has been steadily increasing in the United States.
That means that if left alone, the Social Security Trust Fund can pay full benefits through 2033. Beneficiaries will then receive a lesser benefit beginning in 2034 if Congress doesn’t act in the meantime.
Will Social Security Ever Dry Up Completely?
The last time Social Security faced a reserve deficit was 1983. At that time, massive bipartisan legislation was necessary to resolve the solvency issue. Among other changes, Congress increased the full retirement age from 65 to 67 over time. In addition, they began to tax Social Security benefits as ordinary income for high-earning beneficiaries.
Following these events, Social Security became known as “the third rail of American politics.” In other words, Social Security is the one entitlement program policymakers know not to touch. Unfortunately, that also means politicians haven’t been particularly motivated to address Social Security issues in the absence a looming crisis.
Now, with crisis on the horizon, a solution is necessary for the Social Security Administration to continue paying full benefits. Congress essentially has two options: cut Social Security benefits or increase tax revenue.
House Democrats recently introduced the Social Security 2100 Act. This would increase benefits for low-income workers, change the cost-of-living-adjustment (COLA) index, and reapply the payroll tax rate to the highest-earning individuals. However, legislation regarding Social Security can’t pass with a simple 51-vote majority in the Senate. That means any new legislation will once again require bipartisan support.
Ultimately, the future of Social Security depends on the ability of Congress to agree on a proposed course of action. Given the potential political implications, it seems unlikely that either party would let the Fund dry up altogether. Nevertheless, American workers may want to consider taking steps to reduce their reliance on Social Security benefits in retirement.
Preparing for an Uncertain Future
Waiting on Congress to shore up Social Security may not be the best approach, especially if you’re nearing retirement age. Although 12 years may seem like a lifetime in government, it’s merely a stone’s throw when it comes to your retirement timeline.
One way to minimize the role Social Security plays in your retirement plan is to supplement it with additional retirement savings—for example, contributing to an employer-sponsored retirement plan and/or individual retirement account (IRA). And the earlier you start, the better.
In 2022, individuals can contribute up to $20,500 to a 401(k), 403(b), and most 457 plans. Meanwhile, you can contribute up to $6,000 to a Roth or Traditional IRA ($7,000 if you’re age 50 or older). However, if you’re not able to max out your contributions, contributing even a little bit to retirement each month can yield meaningful results over time.
If your employer matches your retirement plan contributions, maxing out your matching contributions should be your top priority. Otherwise, you’re leaving money on the table.
Lastly, depending on how far from retirement you are, it’s important to invest your retirement savings to grow your nest egg and outpace inflation. Qualified retirement accounts offer certain tax advantages that allow you to grow your funds tax-free until you withdraw them in retirement. This benefit amplifies the power of compounding that long-term investors typically enjoy.
Bottom Line: Don’t Rely on Social Security to Fund Your Retirement
Though Social Security may never dry up completely, it’s possible your benefits will be meaningfully reduced by the time you reach retirement age. No matter the future of Social Security, proper planning is key for a successful retirement.
Benchmark Wealth Management provides holistic financial planning and investment management services for high-net-worth professionals and retirees. If we can help you plan for a financially secure retirement, we encourage you to connect with us to see if we’re a good fit.
Richard W. Stout III is managing director of Benchmark Wealth Management, LLC, with 25 years of experience in the financial industry. He specializes in financial planning and asset management for individuals, families, and institutions seeking to build and monitor durable and sustainable plans for their financial futures. Rick is a Certified Financial Planner™ professional and holds the Accredited Investment Fiduciary® (AIF®) designation. He obtained his MBA from Rensselaer Polytechnic Institute and his BA in Economics and Anthropology from the University of Connecticut. Rick has earned a Master of Science degree in Personal Financial Planning from the College for Financial Planning. He has extensive background experience in lending, credit review and analysis, and real estate and partnership management. Learn more about Rick by connecting with him on LinkedIn.
Thomas J. Britt is managing director of Benchmark Wealth Management, LLC, with 20 years of experience in the financial industry. He specializes in executive financial planning, retirement planning, investing, as well as the management of trusts and endowments. Thomas is a CERTIFIED FINANCIAL PLANNER™ professional and holds the Master Planner Advanced StudiesSM, MPAS®, Certified Investment Management Analyst® (CIMA®), and Chartered Retirement Planning Counselor℠, CRPC® designations. He earned a Bachelor of Science in Finance from the University of New Haven, an MBA in financial technology from Rensselaer Polytechnic Institute, and a Master of Science in Personal Financial Planning from the College for Financial Planning. He is also a proud veteran of the United States Navy Submarine Force. Learn more about Tom by connecting with him on LinkedIn.
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