social security card and cash

What Everyone Gets Wrong About the Future of Social Security

You’ve probably seen the claims that Social Security is going bankrupt. Or you’ve heard conversations about retirement planning prefaced with the words “if Social Security is even around by then.” 2035 is often circled as the date the program goes broke.

There’s an element of truth to these claims, but the real picture isn’t quite as scary as it seems. Keep reading to learn why your future Social Security benefit isn’t doomed.

A Social Security card sits in a pile of cash.

Image source: Getty Images.

What’s really going on with Social Security?

Social Security started paying out more in benefits than it collected in 2021. As a result, Social Security is dipping into the $2.9 trillion reserves held in its two trust funds: the Old Age and Survivors Insurance (OASI) trust, which pays retirement and survivors benefits, and its Disability Insurance (DI) trust.

The reasons boil down to demographics. People are living longer and having fewer children. That means fewer workers paying into the program and more beneficiaries. Consider that in 2021, there were 2.8 covered workers for each Social Security beneficiary. But by 2035, the worker-to-beneficiary ratio is expected to shrink to 2.3 to 1.

According to current projections, the OASI trust will be depleted by the end of 2034. Come 2035, payroll taxes would only fund 77% of scheduled retirement and survivor benefits. The picture isn’t as bleak for the disability trust. For the first time since 1983, the latest Social Security trustee’s report doesn’t project the disability trust will be depleted in the next 75 years.

But the most important thing to know is that Social Security would still be able to pay roughly 80% of total scheduled benefits in 2035 from payroll taxes. Still, a 20% benefit reduction would likely be wildly unpopular, given that about half of people 65 and older rely on Social Security for at least 50% of their income.

How could Congress fix Social Security?

This isn’t the first time Social Security has faced a solvency crisis. In 1977, Congress raised the payroll tax rate and the maximum taxable wage base in response to projected shortfalls. Congress addressed insolvency concerns again in 1983 by enacting changes that gradually raised the full retirement age from 65 to 67 and made some Social Security benefits taxable.

A number of proposals have been floated over the past decades to fix Social Security’s shortfall. They include:

  • Eliminating the taxable wage cap: In 2023, only the first $160,200 of wages are subject to the 6.2% Social Security tax. This number increases in most years. Drastically increasing the wage cap or eliminating it altogether is one way Congress could shore up additional Social Security funds.
  • Increasing full retirement age: Full retirement age — the age at which you’re eligible for your full Social Security benefit — is 67 for anyone born after 1959. Raising the full retirement age again could encourage older Americans to continue working and paying into the system while delaying benefits.
  • Raising the payroll tax rate: According to R. Douglas Arnold, professor of politics and public affairs, emeritus, at Princeton University and author of the book Fixing Social Security: The Politics of Reform in a Polarized Age, raising the payroll tax from the current 6.2% to 8.1% would keep Social Security solvent for the next 75 years.

Should you count on receiving your full Social Security benefit?

Social Security is enormously popular. It’s played an extraordinary role in lifting older Americans out of poverty. So it’s likely that Congress will eventually take steps to fix the program to avoid benefit cuts.

But if you want to err on the side of caution in retirement planning, you could reduce the amount you expect to receive from Social Security by 20% and invest extra to make up the shortfall. You could also plan to delay claiming your benefit so you can hold out for more money.

Though a benefit cut is unlikely, it’s best if you’re not depending on Social Security to fund most of your retirement. Someone who worked their entire adult life and retired at 65 in 2022 could expect their benefit to replace about 37% of their income on average.

That’s why it’s important to start investing early and consider working longer if you’re getting a late start. Even if benefit reductions never become a reality, relying too heavily on Social Security will leave a shortfall in your retirement budget.

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