If you’re getting close to retirement, you’ve probably considered Social Security and wondered what its status will be once you get to retirement.
Afterall, I’m sure you have seen the scary headlines about Social Security being depleted sooner than expected. So, I’m going to give you an update on the facts about the Social Security program.
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What is Social Security?
Social Security is an important part of retirement income.
The program is made up of two trust funds:
- Old Age and Survivors Insurance (this is the retirement income portion)
- Disability Insurance
Each year, a Social Security Trustees Report presents the current and projected financial status of the Social Security trust funds.
According to the 2021 Trustees Report, the trust funds for Social Security benefits will be able to pay all benefits in full and on time for the next 12 years, until 2034.
This report predicts that the Social Security reserves will be depleted in 2034. This is one year sooner than was predicted in 2020.
The program has been affected by the COVID pandemic with more people retiring and collecting benefits sooner and fewer people paying into Social Security.
What Will Happen in 2034?
None of this means that Social Security will “run out” of money in 2034.
There will still be money available to pay 78% of benefits in 2034 because workers will be continuing to pay into the Social Security system.
Social Security is funded by a 12.4% payroll tax. Half of that (6.2%) is paid by employees and the other half is paid by employers.
All payroll would have to end for Social Security to run out of money.
Right now, more money is going out than coming into the Social Security trust funds because thousands of baby boomers are retiring every day and life expectancy is increasing. That difference is coming out of reserves.
The number of Americans aged 65 and older is expected to increase from about 54 million now to over 79 million by 2035.
When you review your Social Security statement, there is a note at the bottom that says “We base benefit estimates on current law, which Congress has revised before and may revise again to address needed changes.”
If Congress doesn’t make any changes, based on this report, retirees could be looking at reduced benefits of 22% in the future.
However, there are things Congress can do to increase the solvency of Social Security and avoid future reduced benefits.
- Increase the cap on wages that are subject to the Social Security tax. In 2021, wages over $142,800 are not subject to the tax.
- Increase the percentage of taxes withheld for Social Security. The current 6.2% tax withheld hasn’t increased since 1990.
- Change future ages of when benefits kick in for younger adults. Full retirement age was originally 65 and is now 67, so I could see them bumping the age up a bit now that we are living longer.
How Does This Affect Your Retirement Plan?
Now let’s assume Congress doesn’t make any changes and Social Security benefits do get reduced by 22% in the future. How does this affect your retirement plan?
Would you want to claim Social Security benefits earlier simply based on this report? I don’t think you would or should if you don’t need to.
By claiming early at age 62, you would already be taking up to a 30% reduced benefit by not waiting until full retirement age.
Then you would have an additional 22% cut due to this recent report. So you would be taking a cut on top of a cut.
What if you could take that cut on the max amount instead? If at least one spouse waits until age 70 to collect benefits, they are going to collect 132% of their full-retirement-age benefit.
If that 22% cut does happen, I would rather have the cut on the max amount as opposed to the earliest amount at age 62.
Don’t let scary headlines shake you off your retirement plan. Collect your benefits when they are right for you based on your unique needs. Maintain your long-term focus.
You can review your estimated benefits at SSA.gov/MyAccount.
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