Will Fixing Social Security Impact Those Planning for Retirement?
As many Americans planning for retirement are well aware, Social Security has been running out of money for decades. Based on the most recent report to Congress by the Trustees of the Social Security program, this problem has only become worse over the last decade. In fact, it is estimated that next year the costs of providing Social Security will be more than the money coming into the program. Based on these figures, the question for many planning for retirement is “will Social Security be there for me?”
The first step in answering this question is to check out your Social Security statement and understand what you are projected to receive when you elect your benefits. You can easily download your statement directly from the Social Security Administration by signing up for an online account.
Outside of understanding your personal benefit, it’s also good to understand what’s happening with Social Security funding generally.
Social Security is Not Bankrupt
Let’s be clear from the outset, while the latest report does raise issues of real concern that should be addressed, Social Security is not going bankrupt any time soon. In fact, Social Security trust funds are at an all-time high. However, there are weaknesses in the system that are important to understand. At the heart of the challenges facing Social Security is how the program is funded in the first place.
Social Security has Two Primary Sources of Funds
First are payroll taxes paid by employees and employers on wages. Basically, those who are currently working pay a tax to support the benefits of those who are retired. In 2017, 88% of total Social Security funding came from payroll taxes.
The next largest source for Social Security funding is interest that is earned on the Social Security Trust. This means that the surplus funds that currently exist are invested. The returns on those investments account for 9% of the Social Security funding in 2017.
These two sources of funds alone account for 97% of the total funding for the program… and is the cause of the program’s current weakness.
The Root of the Problem
First, the Social Security program is based on current workers funding those claiming Social Security. However, as the baby boomer generation moves into retirement, the number of current workers paying into the fund is going down while the number of former workers in retirement is going up. This means fewer workers must support more retirees. The problem only gets worse if the government starts dipping into the Social Security Trust to cover the shortfall next year. With less money invested, the second major source of funding – interest on investments – will also begin to shrink which results in further shortfalls.
This problem has, of course, been known for some time now. However, this year’s projections show that Social Security faces a large and growing funding gap that will require Congress to act at some point. Notably, Social Security program’s costs will exceed its income in 2020, forcing the program to dip into its trust fund to cover benefits. Additionally, this year’s report projects that the Social Security trust fund supporting retirement benefits will run out of money in 2034.
What are potential fixes?
Given these figures, it is clear that some action will need to be taken in most of our lifetime to shore up Social Security. However, for those thinking about retirement, there are many different proposed fixes with different potential impacts on your retirement. For example, some of the most discussed proposals include:
- Raising the full retirement age to 68 – if full retirement age was increased by two months each year starting in 2023 until it reached 68 in 2028, this would fill 16 percent of the funding gap.
- Increasing the Payroll Tax Cap – if the Social Security payroll tax, which currently applies only earnings up to $118,500, was applied to earnings above $118,500, additional revenue to support benefits would be generated.
- Reducing benefits for higher lifetime earners – by using a sliding scale to reduce the benefits most for higher earners, make smaller changes for middle earners and make no benefit changes for lower earners, Socials Security could fill a portion of the funding gap.
While these are just some of the solutions that have been discussed, what is crucial is that Americans understand exactly what the impact of any proposed changes be on their retirement plan.
To understand the impact, it’s important to understand your Social Security benefits
Despite the fact that retired Americans lean heavily on Social Security, many Americans don’t know how much they will receive in benefits or how their benefits are calculated which makes it difficult to understand which changes, if any, would impact you.
The good news is that it’s not hard to find out what your estimated monthly benefits will be when you retire — all you need to do is sign up for an online account at the official Social Security Administration website. Creating a “my Social Security” account will give you access to your personal earnings history, your estimated monthly benefits, and other valuable info you need to know.
Additionally, taking a look at this information before you retire could help you make some crucial financial decisions and better understand the impact of any potential changes to the program.
Here’s why you should create an account as soon as possible:
- It will help you keep track of potential benefit changes – The more you know about your benefits and when they are available, the more you’ll understand how future Social Security rule changes could impact them.
- You can view your personal estimated monthly benefits amount – If you view your potential benefits before you retire, it can get you thinking about how much you need to be saving in your other retirement accounts and how much more you’ll receive if you wait until your full retirement age, as opposed to taking your benefits early.
- You can verify your earnings history – the government calculates your monthly Social Security benefit amount by averaging salaries from your 35 highest-earning years. If for some reason the government has reported your earnings incorrectly during some of those years, then your monthly benefits could end up lower than they should be.