By Money & Finance Editor Ellen Duffy, CFP™
The Social Security Board released its annual report on the financial status and outlook for the Social Security Trusts. The Social Security trust fund is projected to be depleted by around 2033—2035. While the long-term unsustainability of Social Security has been widely reported, the recent report indicates that increasing health care costs, an aging population, and new legislation affecting benefits have contributed to earlier depletion dates.
Once the reserves are depleted, Social Security can likely pay about 79%—80% of estimated benefits. While this might sound alarming, it does not mean Social Security will disappear. It does, however, suggest that the program may have to cut benefits if Congress doesn’t act to bolster the program’s finances.
As you may know, Social Security is a pay-as-you-go program. Workers today fund benefits for retirees through payroll taxes. Even without the trust fund, tax revenue may continue to fund benefits. The federal government has options to strengthen the program, including raising taxes, adjusting benefits, or changing the retirement age gradually. While none of these options may be politically palatable, they are possibilities—and lawmakers have strong incentives to act.
Social Security faced a similar crisis in the early 1980s. At that time, a bipartisan commission was formed, and Congress passed a set of reforms. The system was stabilized for decades. The recently appointed Social Security Commissioner Frank Bisignano states that the financial status of the trust funds remain a top priority of the current administration.
AARP CEO Myechia Minter-Jordan states: “Congress must act to protect and strengthen the Social Security that Americans have earned and paid into throughout their working lives. More than 69 million Americans rely on Social Security today and as America’s population ages, the stability of this vital program only becomes more important.”
Social Security benefits and tax reform will likely continue to evolve. Maintaining good financial habits and understanding your options can help to retire with confidence.
How to help manage expectations for social security benefits:
1. Understand the facts: Start by reading your Social Security statement at ssa.gov. This gives you personalized projections and an understanding your benefits.
2. Under 50? You may want to consider planning for Conservative Benefits: If you’re under 50, it’s reasonable to plan for reduced benefits – say, 75%–80% of your full estimate. That way, you’re not relying on promises that may be adjusted in the future.
3. You may want to consider diversifying your retirement income: Save more. Social Security was never intended to be the sole source of income in retirement. Consider building up retirement savings through 401(k)s or 403(b)s, IRAs and other investment or savings accounts. The more sources you have, the less pressure you’ll feel from any potential Social Security changes.
4. It may make sense to delay claiming if possible: Delaying Social Security benefits until age 70 significantly increases your monthly payment. This can act as a buffer against future reductions, especially for people in good health with other income sources.
Ellen Duffy is a Certified Financial Planner™, founder and owner of Parkway Wealth Management, a comprehensive financial practice with a focus on women and families. Learn more about Ellen and Parkway Wealth Management at www.parkwaywealth.net. Investment advice offered through Private Advisor Group, a registered investment advisor.