“Social Security will run out of money in 2035!”
While that may be correct, it’s not a reason to panic.
When Social Security, formally known as Old-Age, Survivors, and Disability Insurance (OASDI), began administering payments for retirees in 1940, there were 42 workers for every retiree receiving benefits. The SSA’s OASDI is a pay-as-you-go system. Today, there are about 2.7 workers for every benefit recipient.
The demographics are working against the system: fewer people are being born and aging workers are leaving the workforce in large numbers to begin Social Security benefits.
In prior years, the monies collected that were more than the monies paid out went into a Social Security Trust Fund. The monies were “invested” in US government securities.
As Social Security has years with more outgo than income, it will draw upon the reserves sitting in US Treasuries. The reserves won’t last forever.
The solution?
Increase the revenue.
There needs to be more money coming in than being paid out. Options to consider:
1. Raise the Payroll Tax Rate
Increase the Social Security payroll tax from the current 12.4% to a higher rate like 15.84%. It could close the gap if implemented immediately. Delay would require an even higher increase.
2. Increase the Taxable Maximum Earnings
Currently, only wages up to a certain cap indexed for inflation are taxed for Social Security. Currently, the cap is $176,100. Raising the cap on earnings to $310,000+ would significantly boost revenues.
3. Include More Workers
Requiring all newly hired state and local government workers to participate in Social Security would broaden the contribution base (currently 13 states have government workers who do not contribute to Social Security).
Reduce or Modify Benefits
It’s also important to consider adjustments on the spending side. Since the program’s solvency depends on the balance between incoming funds and outgoing benefits, policymakers often look at changes to the benefit structure as another lever for ensuring long-term sustainability.
1. Adjust the Benefit Formula
Making the formula more progressive by reducing benefits for higher earners while protecting or increasing benefits for lower earners would reduce costs.
2. Raise the Eligibility Age
Raising the full retirement age from 67 to 70 would save money and reflect longer life expectancies.
3. Change Cost of Living Adjustments (COLAs)
Using a slower-growing inflation measure such as chained CPI would reduce the growth of benefits over time. (The current COLA formula doesn’t cover the rising costs of medical care).
Next Steps for Social Security – and Your Retirement
Restoring Social Security’s solvency will require some combination of higher taxes, broader coverage, and/or lower benefits especially for high earners.
Most experts and bipartisan plans recommend a balanced mix of these options to ensure the program’s long-term stability. A bipartisan effort would be needed as this would require a 60-vote count in the Senate.
In the meantime, don’t panic over sensational headlines. Social Security has made timely benefit payments for 90 years. That isn’t going to change now.
Call our office today at 208-343-7777 to review contingency options for your retirement plan!
Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Boise Retirement Coach and Cambridge are not affiliated.