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 definitely 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 Social Security continue to operate in its current form without any changes? We will answer those questions and more in this article. 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
To fully understand what the future of the program looks like, it helps to have a general understanding of the history of Social Security and how it works.. Most people realize that they get Social Security taxes taken out of their paycheck each month. However, that money is not going into your own personal retirement fund to be used when you retire. That money goes into the Social Security trust funds and is used to pay benefits for current retirees. In years past while the baby boomers were in the workforce, there was a surplus of funds. They were paying more in taxes than was required to pay benefits for the previous generation. However, that has recently changed. With the baby boomers now into retirement, there are not enough millennials working and paying into the system to completely fund the benefit payments. This means that the balance in the trust funds is getting lower and lower, so changes must be made. So, is Social Security going away? Probably not any time soon.
According to the annual report from the Social Security Administration, more specifically the Trustees report, the program has enough money to continue paying current and projected benefits on time through the year 2037. However, at that time, it will only have enough money to pay for about 76% of its obligations. So, the time to act is now. If Congress does not take action to make changes to the program, then 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 15 years of Social Security appear to be fine, changes will be required moving forward. So, just what will those changes look like for Americans receiving benefits? No one knows for sure, but the next section describes some of the most likely scenarios.
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 for sure 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.
Increase The Social Security Tax
While nobody likes tax increases, this appears to be one of the quickest and easiest solutions. Since the benefit payments currently exceed the tax revenues being collected, a potential solution is to simply raise the payroll taxes. The current payroll tax rate for Social Security taxes is 6.2% for employees and the same amount for employers. This equates to a total of 12.4%. It is estimated that those would need to raise by about 4 percentage points to raise enough money to fully fund the program. While this seems to be a simple solution, there does not appear to be much appetite from Congress in going this route.
Increase The Wage Tax Limit
Today, the Social Security tax limit is $142,800. This means that you do not pay Social Security taxes on any income above this amount. Instead of raising the tax rates, another option to increase the tax revenue is to raise the tax limit. This could potentially raise enough money to continue funding the program. It would only affect those high earners who make more than the current limit of $142,800, although their employers would also be affected. Raising taxes on employers can often have a negative effect on hiring and the workforce, but this option will likely be seriously considered as a potential fix.
Raise The Full Retirement Age
With modern health care aiding in the continued rise of life expectancy, people seem to be working later and later into life. Raising the full retirement age would cause people to wait a little later before starting to receive their full benefits. This means that the total benefits paid over their lifetime would be lower. This solution is not extremely popular, especially considering that the retirement age was raised just a few years ago from 65 to 67. Most people do not want to continue working into their 70’s, so it is unlikely that this solution will be selected.
Reduce Benefit Amounts
Reducing benefit amounts is another solution that would have an almost immediate effect on balancing the Social Security budget. Retirement benefits already tend to be fairly low with the average monthly payment currently being around $1,500. Many people in their old age have already discovered that it is nearly impossible to live on Social Security alone, so the option to cut benefits would likely have an extremely negative impact on many Social Security recipients.
Reduce COLA Increases
The Social Security system currently provides for automatic cost of living adjustments to account for inflation. As the cost of goods rises, the benefit payments need to also rise so that people are able to survive. The current COLA increases are tied to the consumer price index, and benefit payments rise by the same percentage each year as the CPI. Reducing these increases would help keep Social Security solvent for a longer period of time, but recipients would again suffer. Particularly during the current Coronavirus pandemic, prices are rising at record rates. A lower COLA increase would have a definite negative effect on benefit recipients. This does not seem to be a great solution for making up the current Social Security shortfall, but it is an option that is on the table.
Who Will Be Affected By Social Security Changes?
Who gets affected by the Social Security changes ultimately depends on which changes take effect. Some of the 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 who currently earn more than the current limit of $142,800. This would greatly increase the tax income, but could have a negative effect on the job market.
Most of the other options that are being explored would affect current retirees. Obviously, cutting benefit payments, raising the retirement age, or decreasing cost of living adjustments would have a negative effect on the older demographic. This could also have a negative effect on 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, although the Medicare tax is separate from the Social Security tax. The solvency of the Medicare program is not explored in this article.
Retiring On Social Security Alone
Most people find it extremely difficult to retire on Social Security alone. One simply needs to look at the average Social Security payments to quickly see why this is the case. The average Social Security retirement benefit payment in America is just over $1,500 per month. By the time an individual pays for household bills and other necessities, there is often barely enough left over 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 the fact 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 15 years.
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 more for their own retirement. Many younger people even believe that there will be no Social Security program at all 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 own retirement is more critical now than ever. So, just how do most people do that? We will give you a few tips and ideas.
First, if your employer offers a 401k program, then you should certainly take advantage of that. Most employers who offer these programs also offer a company match, so that is like free money. Basically, if you contribute 4% of your salary into the plan, then your company will place an additional 4% into the plan as well. 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, and these are great ways to build a nest egg for retirement.
If you do not have access to a 401k plan, then an IRA might be right for you. An IRA is an individual retirement account, and it provides many tax benefits to help you save for retirement as well. While an IRA does have lower contribution limits than a 401k, they are still great vehicles for building retirement savings. When choosing between a 401k vs IRA, it is usually best to max out your 401k first. Then, you can place additional funds into an IRA if you decide to save even more.
In addition to traditional retirement savings accounts like a 401k or IRA, some people choose to build simple savings as well. 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, then you should always consult a professional financial planner. They can help you decide on the proper mix of risk versus return for your portfolio. Even if you do not get things completely right, the key is to get started. Go ahead and start putting some funds away for retirement. Having something saved is certainly 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 one way or another. If Congress acts early enough, then they can be selective about which changes they decide to implement. However, if they fail to act, then the program will not have enough money to pay its obligations within a few years, so benefits will be cut by default. If you already receive benefits or are nearing retirement age, then you should keep a close eye on these changes so that you can learn exactly how they will affect you.
Frequently Asked Questions
Will there be Social Security in 2050?
No one knows for sure what Social Security will look like in 2050 or what will happen to Social Security in the future. Will it still be here in 2050 or will Social Security be around in 50 years? More than likely, the program will still be around in some form. Social Security currently has enough money to fully fund benefit payments through 2037. However, changes must be made for the program to continue operating after that. It might be a tax increase, benefit cuts, or some other option. 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 be gone by 2050, it is not likely to completely go away.
Will Social Security benefits be reduced in the future?
A reduction in benefits is a very real possibility. Social Security currently has a shortfall between tax revenue and benefit payments. This means that they are paying more out each year than they are receiving. By 2037, they will only have enough money to fund about 76% of their benefit payment obligations. If Congress fails to implement another solution, then benefits will have to be cut in order to make up for this difference. This is not an option that anyone wants to see, but it is a real possibility that you should consider.
How will Social Security be funded in the future?
Social Security is funded through payroll taxes that are paid by both the employee and employer. This funding method is not likely to change. However, there could be a rise in the tax rate or the tax limit in future years to help raise additional revenue. Payroll taxes are likely to continue to be the method by which Social Security is funded into the foreseeable future.
How long will Social Security be around?
Many people ask, “What is the future of Social Security?” While no one knows for certain, Social Security will probably be around for many years to come. It could continue in its current format with no changes until the year 2037. However, after that, it could only afford to pay about 76% of benefits. It is likely that changes will occur to the program to help account for this within the next few years, although no one knows for sure what those changes will look like. Even with the impending changes, Social Security will probably be around for quite some time.