If you’ve happened across some of the headlines about the future of Social Security, you may be thinking we should really be talking about the lack of a future for these benefits.
Follow the news around this topic for any amount of time, and you’ll be hit with some alarming claims. Here’s just a quick sampling:
“The entire Social Security program will be fully depleted…in 2034.”
“There’s a 0% chance that the government will be able to honor its existing commitments.”
If these warnings have you doubting the availability of Social Security funds to supplement your retirement income, you’re not alone.
A 2016 Transamerica study found 77% of employees felt the same way. American workers reported feeling worried there would be no money left by the time they could leave the workforce and draw their benefits.
But here’s the thing: these concerns may be unfounded. Is there a legitimate reason to feel alarmed? Are the headlines overdramatic, or do they serve as legitimate warnings?
To answer these questions, you need to understand the history of the Social Security Administration and its benefit program. From there, you can make a more informed, educated prediction for what the future of Social Security will look like — and more importantly, how you can plan for that future.
Where the Social Security Program Started
Social Security’s roots stretch back to the Great Depression, and the program started as a way to ensure financial security for the elderly and disabled. The SSA started with good intentions. The problem? The system was flawed from the start.
The Social Security program was predicated on the assumption that there would be more workers than retirees to fund the benefits, and that people would continue to live to the same median age.
These assumptions might have been factual at the time the program started. But they’re no longer necessarily true, making the original Social Security setup outdated today.
People live longer — in some cases, much longer than they used to. And retiring Baby Boomers who now draw income from Social Security are overloading the system, especially as there aren’t enough younger workers paying into the system to keep it sustainable at current benefit levels.
While politicians have both suggested and actually made policy changes to establish a surplus trust fund, it’s not enough. Social Security is on track to exhaust those funds — and based on that, it looks like people could face a loss of benefits by 2034.
The Future of Social Security: Will There Be Benefits for You?
It sounds like the answer to the question of will there even be a future of Social Security to leverage as part of your retirement plan is a big, ugly no.
But before you panic, know that that’s not necessarily the case. The answer may depend on who you ask.
Some predict that Baby Boomers can always count on including Social Security in their retirement income, albeit with some minor changes, thanks to one big factor: their voting power.
Older voters tend to vote in numbers. Boomers will have a strong voice on this topic and that could influence policy around Social Security.
It’s likely going to be younger generations who will face the biggest changes to their benefits, with two of the most probable solutions to the insolvency problem being:
- A cut to benefits, or,
- An increase in taxes.
Let’s take a look at each of these potential outcomes could look like for future generations.
Cutting Social Security Benefits
We probably won’t see a universal cut in benefits. The more likely scenario? A cut that varies by age and income bracket.
The Social Security Administration could also use means-testing to help evenly distribute benefits based on a demonstrated need. This solution would only affect high-income earners (who may not need Social Security to ensure a secure financial future), but implementing this kind of testing could be cost-prohibitive for the government.
The easiest and cheapest option is for the SSA to simply increase the benefit age across the board. Instead of allowing people to collect Social Security benefits at 62, it may make more sense to raise the benefit age to 69 or 70.
While this sounds painful, it would correct the original flaw in the system that only accounted for a life expectancy of 58-62 (which falls significantly short of current life expectancy of nearly 79).
And remember, retirement and collecting Social Security are two separate events. You can retire before you collect benefits — you just need to do some intentional saving and financial planning to make sure you manage your money well between the time you retire and the age at which you can start drawing benefits.
Using higher taxes as a way to keep funding Social Security is the second potential solution to keeping the program solvent. But this comes with its own pros and cons.
First, let’s talk about how Social Security tax is calculated. Currently, 6.2% of individual income goes to Social Security.
This does not mean, however, that you pay 6.2% tax on every penny you earn, Social Security rates are capped, meaning they are only assessed up to a certain level of income (which is $128,400 as of 2018).
Anything above and beyond your first $128,400 is exempt from Social Security tax, which means if you earn above that, you’re contributing a pretty small percentage of your income to the program.
Increasing or removing the cap could result in substantial revenue — as would simply increasing the tax rate for everyone across the board.
Imposing a 1% increase, every year, for a set number of years can also be a meaningful revenue generator, but may be viewed as excessive taxation. The voting power factor might also come into play here if voters balk at the idea of these across-the-board tax increases..
What the Future of Social Security Means for You
Although there are other proposals beyond these two that could help solve the Social Security problem, these are the two most likely outcomes based on viability.
While we can’t say for sure what Social Security will look like in the coming years, we do know it will look different — and probably not the same for everyone.
Boomers can most likely continue to plan for Social Security as a source of retirement income. Younger workers, though, should be looking to take action now to plan for a worst-case-scenario: no Social Security benefits at all.
Speaking with a financial advisor is an excellent way to determine your financial goals and create a retirement plan that can provide you with the peace of mind that relying on Social Security cannot.