The surprising truth about the future of Social Security | Economic news
Many of us have heard the myth: Social Security quickly running out of money, and there’s a good chance it won’t exist when millennials retire – or even as early as 2035. less of a reason for the optimism surrounding the future of the Social Security benefits program.
Understanding Social Security
Social Security – in the context of retirement planning – generally refers to the monthly benefit that older people receive when they leave their job. When you apply for retirement benefits, you receive a monthly check for the rest of your life, adjusted annually for inflation. (On the subject, retirees collecting benefits in 2023 can expect an 8.7% increase benefit increasethe biggest increase since the early 1980s.)
In reality, the Social Security Administration, or SSA, administers of them programs: the old-age and survivors’ insurance program and the disability insurance (DI) program (collectively referred to as the OASDI programs). When retirees say they receive Social Security, they mean they receive retirement insurance benefits from the Old Age and Survivors program.
The DI program, on the other hand, is aimed at disabled workers and their families; this pool of money is entirely separate from that used for retirees. Note that you cannot collect both programs at the same time.
Concerns about social security
Both social security programs require inputs to cover their projected costs. Inflows come in the form of payroll taxes, which are deducted from workers’ paychecks at a rate of 6.2% of earnings up to a maximum of $147,000 in 2022 ($160,200 in 2023).
Unfortunately, the cost of the Old Age and Survivors’ Insurance (AVS) program may exceed total inflows in 2022. This means that the program will have to draw on the reserves of its trust fund to meet current benefit demands. If the program continues to dip into its reserves to meet projected benefit needs (exacerbated by rising costs and an avalanche of new retirees), the AHV trust fund will run out in 2034.
If this happened, the AVS program would still be able to pay 77% of projected benefits based solely on expected annual inflows. Fortunately, the DI Trust’s reserves are not expected to run out by the end of the century, bringing some comfort to families affected by crippling health conditions.
Yet, it is certain that the OASI program will not meet the needs of aspiring retirees. The question is not so much whether social security will exist, but rather the ability of the administration to pay full benefits on claim receipts. Perhaps even more troubling is that the longer Congress waits to act on the discrepancy, the more drastic action will be needed to close the gap down the line.
A few reasons to be optimistic
Again, the OASI program is not going away, but it is running out of trust fund reserves relative to the ongoing (and growing) cost of the program. It means there will be at least one benefit to be had, even if – in a sub-optimal scenario – the benefits were only 77% of what is due.
Second, the DI Trust is healthy, which means workers with disabilities will be able to rely on Social Security disability benefits to cover their basic expense needs.
Finally, it’s no secret that Social Security faces long-term solvency issues when it comes to paying 100% of benefits for the next century. It is at the forefront of legislative discussions, and there is at least some likelihood that we will see an increase in payroll taxes to secure the future of the program. In other words, it’s not a topic that’s going away any time soon.
Don’t rely on Social Security
The chances of Social Security disappearing entirely are probably quite low. A much more likely scenario could be that retirees see a reduction in benefits from 2035. But there’s no way to know for sure until we see legislative action around the program.
For financial planning For purposes, you might consider projecting Social Security revenues at three-quarters of the estimated numbers as more conservative. This will help you plan for the worst while allowing you to hope for a better outcome by seeing steps in Washington to ensure you have full benefits throughout your retirement.
The $18,984 Social Security premium that most retirees completely overlook
If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help boost your retirement income. For example: an easy trick could earn you up to $18,984 more…every year! Once you learn how to maximize your Social Security benefits, we believe you can retire confidently with the peace of mind we all seek. Just click here to find out how to learn more about these strategies.
The Motley Fool has a disclosure policy.