One of the biggest myths surrounding Social Security is the idea that the program is rapidly running out of money. While Social Security may be at risk of depleting its trust funds within the next decade and change, it's also expected to have plenty of money coming in.
The reason? Social Security gets the bulk of its revenue from payroll taxes — you know, the taxes none of us particularly enjoy paying. Now that revenue stream is expected to decline once baby boomers start leaving the workforce in droves, because while younger workers will start coming in to replace them, that may not happen at a fast enough pace.
As long as Social Security continues to collect payroll taxes, it can continue to pay benefits. But that doesn't mean there won't be big changes to the way benefits are paid.
It's not the worst-case scenario
It's natural to have a doom and gloom outlook when it comes to Social Security, because the media tends to play up the fact that the program is facing a serious financial shortfall in the coming years. That's all true.
But the program isn't about to go bankrupt. And so workers today don't have to write off the idea of being able to collect retirement benefits.
That said, benefits could undergo substantial changes. For one thing, they could be reduced universally if lawmakers aren't able to find a way to pump more money into Social Security.
Now thankfully, at this point, nobody is talking about a 50% or 60% reduction in benefits. If anything, seniors are looking at more like a 20% cut. But still, that represents a substantial loss of income for those who get the bulk of their retirement funds from Social Security, so it's something seniors will need to prepare for and workers will need to plan for.
Meanwhile, lawmakers may have to take some drastic measures to ensure Social Security's long-term viability. That could mean changing the rules with regard to eligibility.
Right now, anyone born in 1960 or later is entitled to their full monthly Social Security at age 67. But lawmakers may need to push that age back to 68 or 69 to take some of the pressure off of Social Security.
Then there are payroll taxes — the ones needed to fund the program. Right now, higher earners are only taxed on a portion of their income. If a need for revenue arises, lawmakers might choose to lift the wage cap so that workers face Social Security taxes on their entire earnings.
Everyone needs to brace for change
Social Security is not at risk of going away — that's the good news. The bad news, though, is that drastic changes to the program may be inevitable in order to sustain it for years to come. That's something current beneficiaries and workers alike will need to gear up for. And those in the latter boat may need to adjust their retirement plans accordingly as more updates on Social Security come down the pike.
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