The Future of Social Security: Will it Withstand the Test of Time?

The Future of Social Security: Will it Withstand the Test of Time?

By Henry Zupko, MBA, CFP® 

The buzz around Social Security isn’t exactly uplifting. A whopping three-quarters of people over 50 fear the program will dry up during their lifetime. And nearly 40% of younger generations, like Gen Z and Millennials, doubt they’ll see a dime from it. These concerns stem from reports warning of the Social Security Trust Fund’s impending depletion. They paint a grim picture where our hard-earned benefits might shrink drastically or even vanish.

But hold on—let’s not get swept away by the headlines just yet. It’s time to dive deeper and understand the challenges Social Security faces while exploring potential solutions. Though there’s work to be done, I’m here to say it’s not all doom and gloom. Social Security is just one piece of the retirement puzzle, and there are ways to make it work for you.

Read on as I explain the sustainability of Social Security, uncover potential fixes, and offer strategies to help stabilize your financial future.

Concerns About Social Security’s Sustainability

The fears about Social Security are not unfounded. According to the most recent Social Security Trustee report, the Social Security Trust Fund will be completely depleted by 2034, one year earlier than previously thought. 

With that said, does that mean that no benefits will be paid out after that point? No, not at all.

Currently, Social Security benefits are paid for via a combination of distributions from the trust fund, as well as payroll taxes. If the trust fund were depleted by 2034, then payroll taxes would be able to cover approximately 77% of Social Security benefits. 

If that were to happen, with no changes to the program in the meantime, then people receiving Social Security benefits would experience a pretty significant pay cut. While neither I (nor you) have a crystal ball, my guess is we’re far more likely to see changes to the program, as opposed to a 23% pay cut that would hurt all the retirees in this country.

How Social Security Might Cover the Shortfall

At its core, the challenge of maintaining the solvency of Social Security boils down to two relatively simple strategies: raise more money (by increasing taxes) or cut benefits. Will we need to do one of these strategies entirely? Probably not. Most likely it will be some kind of compromise. But here are a few ideas that have been brought forth as solutions to fund the gap we’re facing:

Raise Taxes  

  1. Increase Payroll Tax Rate: A proposal to raise the payroll tax rate from 12.4% to 15.5% in 2034 offers a significant potential to bridge the financial gap. While this shared increase between employers and employees could help cover a good amount of Social Security’s solvency gap, it isn’t realistic for many lower-income Americans. A gradual increase would be less disruptive. 
  2. Adjust the Taxable Maximum: Presently, only wages up to $168,600 are subject to Social Security tax. By either increasing this cap, eliminating it, or introducing a tax on higher earnings tiers, the system’s shortfall could potentially shrink. Depending on implementation, such adjustments could tackle a major portion of the solvency shortfall.
  3. Create New Tax Sources: An additional revenue stream to fund Social Security could be created by taxing additional sources of income, such as investments, or increasing estate and gift taxes. This has not been done before and may face opposition from taxpayers.

Cut Benefits

  1. Raise the Retirement Age: The concept of gradually raising the retirement age addresses the reality of increased life expectancies. The proposition involves extending the retirement age by two months annually until it reaches 69, after which it would be indexed to life expectancy, essentially adapting to shifting demographics. While the early retirement age of 62 would remain unchanged, beneficiaries may need to wait longer to receive their full benefit. 
  2. Increase the Number of Earning Years for Benefit Calculation: Currently, Social Security determines benefits based on an individual’s top 35 earning years. By extending this time frame to 40 years, the inclusion of additional low- or zero-earning years could reduce the average benefit amount.
  3. Reduce Benefits for High-Earners: The strategy behind this is to focus on offering more substantial benefits for lower-income and middle-income earners, and progressively reduce benefits for higher incomes. 

When Should You Take Social Security?

Given the potential changes to Social Security in the next decade, making a well-informed decision about when to claim your benefits has become even more crucial. While some people may want to claim as soon as they’re eligible at age 62, often driven by concerns about the program’s solvency, that may not be the best solution. Waiting until full retirement age or beyond can increase your monthly benefits, perhaps substantially. For high-earners particularly, delaying may help mitigate some of the impact of potentially reduced benefits. 

It’s crucial not to base your benefit claiming decisions solely on solvency concerns. For instance, if you anticipate a 20% reduction in benefits in the future and use this as a reason to claim benefits early, you’re focusing on the wrong aspect. Rather than fixating on what might be lost, concentrate on what remains. Opting for a higher benefit claimed at 70, even if 80% is retained after a cut, yields more than 80% of a lower benefit claimed at 62. If you genuinely anticipate benefit reductions, you may want to try maximizing your benefits so more remains post-cut.

Moreover, a number of other factors, like life expectancy, health status, marital status, employment opportunities, and other retirement income sources, can help inform this critical decision. And those factors may be just as, or even more important, than the potential changes that are made to Social Security. 

It’s essential to personalize this choice based on your unique circumstances, possibly with the assistance of an experienced financial advisor, to help maximize your lifetime benefits so you can enjoy your retirement.

Plan Ahead for Life’s Changes

Working through the complexities of Social Security while listening to concerning news headlines can be challenging (to say the least). It demands a clear understanding of where things are headed, a calm approach to decision-making, and awareness of broader retirement issues.

At Tranquility Path Investment Advisors, we recognize that not everyone wants to tackle this alone. Our primary goal is to ease the stress of major life transitions by offering experienced and knowledgeable guidance. If you’re seeking assistance, we’re here to support you. Schedule a no-obligation conversation or reach us at (908) 759-6322.

About Henry

Henry Zupko is founder and president at Tranquility Path Investment Advisors, LLC, an independent Registered Investment Advisor firm dedicated to putting their clients first, always. With over 30 years of experience, Henry sets the direction of the firm, manages, and in many cases personally interacts with clients to help develop financial strategies that set them on a tranquil retirement path. He is passionate about being a trusted partner to his clients, developing long-lasting relationships so he can guide them through life’s milestones, twists, and turns. In all he does, Henry strives to make a positive impact on others and help change their lives for the better. 

Henry is a CERTIFIED FINANCIAL PLANNER™ professional and holds an MBA from the University of Massachusetts and a bachelor’s degree in electrical engineering from the New Jersey Institute of Technology. Henry is a proud Eagle Scout who loves traveling the world and spoiling his grandchildren. To learn more about Henry, connect with him on LinkedIn.

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