The future of Social Security has been a hot topic for the past several years. With millions of retirees relying on the plan for retirement income, an uncertain future makes them a little uneasy.
We continue to hear in the news that Social Security is running out of money, but is that true? Just how long can it operate in its current form without any changes? This article will answer those questions and more.
Keep reading to learn what the future of Social Security looks like and what changes might be on the horizon that could affect you and your benefits.
The Future Of Social Security Benefits
Understanding Social Security’s history helps one fully understand its future.
Most people realize they get Social Security taxes taken from their paychecks each month. However, that money is not going into your own retirement account to be used when you retire.
That money goes into the Social Security trust funds to pay benefits for current retirees.
Surplus of Funds
In years past, while the baby boomers were in the workforce, there was a surplus of funds.
They were paying more taxes than was required to pay benefits for the previous generation. However, that has recently changed.
Lack of Funds
With the baby boomers now in retirement, not enough millennials are working and contributing to the system to fund the benefit payments completely. This means that the balance in the trust funds is getting lower and lower, so changes must be made.
Is Social Security going away?
Probably not anytime soon. According to the Social Security Administration’s annual report, specifically the Trustees report, the program has enough money to continue paying current and projected benefits on time through 2034.
- It will only have enough money to pay about 80% of its obligations at that time. So, the time to act is now.
If Congress does not take action to change the program, benefit recipients could see their benefits cut by nearly 25% at that time. Payments might be late, and there could be other negative consequences. So, while the next ten years of Social Security appear fine, changes will be required.
So, just what will those changes look like for Americans receiving benefits? No one knows, but the next section describes some of the most likely scenarios.
KEY TAKEAWAYS
- The Social Security program will likely continue despite rumors of its impending demise. However, changes will need to be made to the program to meet the funding challenges.
- Changes to the program will most likely impact today’s workforce the most but will inevitably impact current retirees as well.
- Without changes implemented, the current Social Security Trust Fund surplus will most likely run out by 2034.
Potential Changes To Social Security
There continues to be much debate about which changes would work best for the Social Security program. While nobody knows what Congress will ultimately decide, here are a few changes that appear to be the most likely.
Will Social Security survive these changes? Probably, but it might look a little different than it does today.
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Who Will Be Affected By Social Security Changes?
Who gets affected by the Social Security changes ultimately depends on which changes take effect. Some changes would affect current workers, while others would affect retirees and benefit recipients.
Raising the payroll tax rate or the tax limit would affect today’s workers.
- A rise in the tax rate would affect all employees and employers,
- While a rise in the tax limit would only affect those taxpayers earning more than the current limit of $168,600.
This would significantly increase the tax income but could hurt the job market.
Most of the other options that are being explored would affect current retirees.
- Cutting benefit payments,
- Raising the retirement age, or
- Decreasing cost of living adjustments would harm the older demographic.
This could also hurt people receiving disability insurance payments or survivors’ insurance payments, depending on how drastic the cuts need to be.
These solutions also do not consider the costs associated with Medicare since the Medicare tax is separate from the Social Security tax. This article does not explore the solvency of the Medicare program.
Retiring On Social Security Alone
Most people find it extremely difficult to retire on Social Security alone. One needs only look at the average Social Security payment to see why this is the case.
The average Social Security retirement benefit payment in America is just over $1,905 monthly. When an individual pays for household bills and other necessities, there is often barely enough left for food.
This is why many Americans in the elderly demographic suffer financially. Unfortunately, many of them rely completely on Social Security for their income, and they are often not able to make ends meet.
Consider that people who rely completely on Social Security already struggle, and then think about the current options for changing Social Security. You can see why the options to reduce benefits or reduce COLA increases are not popular.
While this is not an easy decision, the Biden administration must take the lead and create a solution to the Social Security solvency issue. If left unsolved, a benefit cut will be unavoidable within approximately the next ten years.
TIP
It would be best not to rely on Social Security retirement benefits as your only source of income in retirement. It’s important to build an additional nest egg for retirement through 401ks, IRAs, and other types of savings accounts.
Planning For Retirement Without Social Security
As you can see, relying totally on the Federal government and Social Security for your retirement is not a great idea.
People are starting to realize this, and many younger people are trying to save for retirement through IRAs and 401k’s. Many younger people even believe there will be no Social Security program once they reach retirement age.
Given the report from the Board of Trustees from the Social Security trust funds, this idea is not that far-fetched. Planning and saving for your retirement is more critical now than ever. So, what tools and programs are available for retirement? We will give you a few tips and ideas.
Employer 401k Plans
If your employer offers a 401k program, you should undoubtedly take advantage of that. Most employers who provide these programs also offer a company match, which is like free money.
In a typical 401k setup, if you contribute 4% of your salary to the plan, your company will also contribute an additional 4%.
You have many investment options in these plans, and the stock market traditionally offers decent returns on your money. Most people in the corporate world have a 401k plan, which is a great way to build a nest egg for retirement.
Roth and Traditional IRA’s
If you do not have access to a 401k plan or want to contribute to a different retirement plan, an IRA might be right for you.
An IRA is an individual retirement account that provides many tax benefits to help you save for retirement.
While an IRA has lower contribution limits than a 401k, they are still great for building retirement savings. You can even contribute to your 401k and IRA at the same time.
There are two types of IRA accounts: a Roth IRA and a Traditional IRA. Each has different tax benefits that you should consider.
Savings & Brokerage Accounts
Some people choose to build simple savings accounts in addition to traditional retirement savings accounts like a 401k or IRA. They might invest money in the stock market or high-interest rate savings accounts like a certificate of deposit or money market account.
If you need help or advice, you should always consult a professional financial planner. They can help you decide on the proper mix of risk versus return for your portfolio.
These options are great ways to begin investing for retirement, so don’t be afraid to start. The sooner you start, the better. Having something saved is better than nothing!
The Bottom Line
The future of Social Security is uncertain, but one thing is for sure: Changes will be required to the program.
If Congress acts early enough, it can be selective about which changes to implement. However, if it fails to act, the program will not have enough money to pay its obligations within a few years, so benefits must be cut.
If you already receive benefits or are nearing retirement age, you should monitor these changes closely to learn exactly how they will affect you.
Frequently Asked Questions
No one knows what Social Security will be like in 2050 or what will happen with the program.
Will it still exist in 2050, or will Social Security still exist in 50 years? The program will likely still exist in some form.
Social Security currently has enough money to fund benefit payments through 2034 fully. However, changes must be made for the program to continue operating after that.
It might be a tax increase, benefit cuts, or other options. No one can say for sure what will happen, so that is why it is extremely important to save for your retirement on your own as well.
While some people believe that Social Security will disappear by 2050, it is not likely to disappear completely.
A reduction in benefits is a genuine possibility. Social Security currently has a shortfall between tax revenue and benefit payments.
This means that they are paying more each year than they are receiving. By 2034, they will only have enough money to fund about 80% of their benefit payment obligations.
If Congress fails to implement another solution, benefits will have to be cut to make up for this difference.
This is not an option anyone wants to see, but it is a real possibility you should consider.
Social Security is funded through payroll taxes paid by both the employee and employer, and this funding method is not likely to change.
However, a rise in the tax rate or the tax limit in future years could help raise additional revenue. Payroll taxes will likely continue to be how Social Security is funded into the foreseeable future.
Many people ask, “What is the future of Social Security?” While no one knows, Social Security will probably be around for many years.
It could continue in its current format with no changes until the year 2034. However, after that, it could only afford to pay about 80% of benefits.
Changes will likely occur to the program to help account for this within the next few years, although no one knows what those changes will look like.
Even with the impending changes, Social Security will probably be around for quite some time.
You can find a Social Security Administration office near you by using our SSA office locator and searching for your closest location.
