Will Social Security Exist When I Retire?
Will Social Security exist when I retire? Will I get full benefits, or will they be cut? What’s going to happen to Social Security?! These are common questions, so let’s explore the problem and possible solutions.
The Problem with Social Security
To understand the problem we need to understand how Social Security works. We are doing an entire workshop on Social Security which will visually explain how it works. Click here to view our Maximizing Social Security Workshop. We’ll cover a short version here.
How Social Security Works
Social Security taxes are withheld from all employee paychecks at a rate of 6.2%. Employers also match this amount. The total Social Security tax is therefore 12.4% of your income (up to $147,000 in 2022).
These taxes go into the Social Security Trust fund. This fund pays benefits to those collecting Social Security. Taxes go in on one side, and benefits are paid out on the other.
Your benefit is based on your highest 35 years of income though and advanced calculation. You can get a lower or higher benefit depending on when you take it. Again, see our Maximizing Social Security Workshop to learn more.
While you might think that your Social Security “contributions” are going to fund your retirement benefit, they actually fund the income of those currently receiving benefits.
The Funding Problem
The Baby Boomers had no problem funding the Silent Generation. More was going into the fund than coming out.
Now the reverse is true. Birth rates fell, and more benefits are paid out each year. This is creating a big funding problem.
The Social Security Trust Fund will run out in 2037, necessitating a 24% drop in Social Security Benefits. This is a big problem, as Social Security is the bedrock for many retirees’ income.
The Coming Cliff
Many have heard of the problems with Social Security. They may have even read articles or heard news reports catastrophizing the problem. They believe that Social Security is doomed and are doubtful they will ever see benefits. How big is this problem? Can we fix it? No one seems to be doing anything about it. Why!?
Imagine you are traveling in a car in a straight line at 60 miles per hour. Wild animals are chasing you, so you cannot stop. One hundred twenty miles ahead of you is the edge of the Grand Canyon. Therefore, you will careen over the edge in two hours and plummet to your death. This is a big problem! In two hours, you are going to die!
Unless… Unless what? Is there a way to fix this?
Perhaps a total solution is not available, but there are ways to delay it. You could potentially slow down to 40 miles per hour without getting caught. That would give you three hours until you go over the edge, and thus more time to find a final solution. Perhaps wild animals are keeping up on either side of you, keeping you from being able to turn at a right angle right now. But perhaps you could turn just a few degree. Turn 10 or 15 degrees to the right or left will increase the distance between you and the edge of the canyon, giving you even more time. Doing both may give you enough time to figure out how to get rid of the wild animals.
We aren’t fixing the Social Security problem because we still have a proverbial two hours before we go over the cliff. And we have more significant problems in the meantime. But the closer we get to the cliff, the higher the priority will be until they are forced to fix it. In the meantime, there are things we can do to delay the consequences.
Options for Fixing Social Security
There are several options we have which each have pros and cons.
We could reduce the benefits of those currently receiving Social Security, either immediately by 13% or in 2037 by 24%.1 That’s not going to happen. Retirees vote. When the problem becomes big enough, someone will run on a platform of “fixing” that problem without reducing benefits and will get enough votes to do that.
Increase Social Security Taxes
The Social Security Board of Trustees projects that if we immediately increase Social Security taxes from 12.4% to 14.4% (1% higher for employees), they would generate enough to pay Scheduled Social Security Benefits for 75 years.1 Not a perfect fix, but it kicks the can down the road long enough that no one now will care.
This would be unpopular, as all tax hikes are. But people would adjust. If your paycheck is $2,000, it would be reduced by $20. While not true for everyone, most people could become accustomed to living on 1% less.
Eliminate the Taxable Wage Base
Currently, one only pays Social Security Taxes on the fist $147,000 of annual income (2022 number, adjusted annually for inflation). This is called the Taxable Wage Base. With the way benefits are calculated, the first $74,000 of that creates a higher benefit than the last $73,000. You get more bang for your buck at lower incomes.
Eliminating the wage base would mean that everyone making more than $147,000 will pay 6.2% on that additional income (and their employers will do likewise). This will immediately increase Trust Fund income without impacting outflows, as all current retirees would still receive benefits based on what they were taxed on. And those who start paying much more in taxes start retiring, and only 15% of that additional taxes will be credited to their benefits, allowing 85% of those increased taxes to benefit others.
Delay the Full Retirement Age (Again)
Full Retirement Age, the age at which you can receive your full calculated benefit, used to be 65 for those born before 1938 (the same as Medicare). They delayed it once to age 66 for those born between 1943-1954 and then again to age 67 for those born after 1959. There were phaseout periods for both.
They could delay it again until age 68 or 69. People wouldn’t necessarily have to work longer, but they would get a reduced benefit if they didn’t.
The birth rate dropping brought on the problem with Social Security more than by people living too long. Forcing them to work longer to get full retirement benefits is a difficult proposition.
Any of the Above
Enacting part of any of these changes would help. It may end up being a combination of several options. They could phase in an increase in Social Security Taxes (exp. 0.2% per year for five years). They could change the bend points to reduce future benefits. They could raise the taxable wage base instead of eliminating it. Each option will have those in favor and those opposed to it.
Will Social Security Exist When I Retire? Yes.
The Social Security train is too long and too heavy to stop it. We cannot abolish it. We cannot phase it out. Too many people are fully or partially dependent on it. And everyone will contribute to it and want something in return.
But something must change. Social Security Benefits will get cut if we don’t make any other changes. And when that doom in imminent, we will make those changes.
People do not change until the pain of staying the same outweighs the pain of change.
They will make some changes. But in the end, everyone will get Social Security Benefits. They may be a bit less. Or you or someone else may end up paying more for them. But they are not going away.
For more on Social Security, participate in our Maximizing Social Security Workshop. It is completely free, and a workbook is available to RetireMembers to aid learning.
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This article is educational only and is not intended to be investment, legal, or tax advice or recommendations, whether direct or incidental. Again, this is not investment advice. Consult your financial, tax, and legal professionals for specific advice related to your specific situation. Never take investment advice from someone who doesn’t know you and your specific situation. All opinions expressed in this article are the opinions of the people expressing them. Any performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be directly invested in.