However, Americas most important social program is facing what could arguably be deemed as its greatest hurdle since inception in 1935, at least according to the latest annual Trustees report.
Released in early June, the Trustees report projects that the program will undergo a change in 2018 that we havent witnessed in 36 years. Namely, Social Security will expend more than it collects in revenue. Though were only talking about a $1.7 billion net cash outflow, which is peanuts compared to the $2.89 trillion the program has in asset reserves, this annual outflow is expected to grow rapidly in size in 2020 and beyond. Should expenditures continue to greatly outpace revenue, Social Securitys $2.89 trillion in excess cash could be gone by 2034.
It Might Be Worse to Take Social Security at 66, Heres Why
What does this mean, exactly? The good news is it doesnt mean the end for Social Security. The programs two recurring sources of income — the 12.4% payroll tax on earned income, and the taxation of benefits — would remain intact and provide funds for disbursement to eligible beneficiaries. The bad news is that it signals a potential cut to benefits of up to 21% by 2034.
The Trustees report went on to forecast that a $13.2 trillion cash shortfall exists between 2034 and 2092. The only way to fix this mess is by raising revenue, cutting expenditures, or implementing some combination of the two.
Generally speaking, practically no solution is less popular among the public than cutting Social Security benefits. As noted, a majority of todays retirees are reliant on the program for a majority of their income. Cutting benefits could therefore put these retired workers at risk of being unable to meet their payment obligations in retirement.
Yet, as crazy as this might sound, cutting Social Security benefits isnt that bad of an idea. If done the right way, benefit reductions could be a positive for the program in more ways than one.
Now, to be clear, when talking about “cutting benefits,” Im not describing a scenario where the federal government takes its proverbial scissors and simply lops off a percentage of what current retirees are due each month, as described in the Trustees report. Rather, these reductions would be passed along in the form of a gradually increased full retirement age.
Your full retirement age is the age at which you become eligible to receive your full retirement benefit, as determined by your birth year. Its set to peak at age 67 for workers born in 1960 or later. By gradually raising the full retirement benefit to age 70, as an example, it would protect existing retirees from any chance of a benefit reduction, but require future generations of workers to make a choice. Either they would have to wait longer to receive their full monthly payout, or theyd claim early and take a steeper reduction to their monthly benefit. Regardless of what they choose, lifetime benefits paid by the program would fall over time, relative to the current payout schedule with a full retirement age that peaks at 67. These savings may be enough to completely bridge the estimated $13.2 trillion cash shortfall through 2092.
For starters, it factors in the adverse impact longevity has had on the program since inception. Between 1935 and 2022, the full retirement age will have increased just two years. Meanwhile, average life expectancies are up nine years since 1960, with more Americans than ever reaching the eligible Social Security claiming age. Raising the full retirement age would reduce the amount of time that retirees are leaning on the program, more closely aligning the program with how it was designed in 1935.
Secondly, it would protect existing retirees from any chance of a benefit cut. By adjusting the full retirement age, only workers who are presumably a decade or longer away from being eligible for Social Security would be impacted.
And finally, since Social Security is only designed to replace 40% of the average workers wages in retirement, a cut to lifetime benefits should coerce Generation X, millennials, and Generation Z to save more of their income and invest for their future, thereby making themselves less dependent on the program. Personal saving rates in the U.S. are anemic, so anything that would encourage better saving and investing habits would be a good thing.
But, as Ive stated previously, no Social Security solution makes more sense over the long run than a bipartisan fix. In addition to raising the full retirement age, which is a solution regularly proposed by Republicans, adjustments should be made to the maximum taxable earnings cap, a proposal by Democrats, to raise revenue. This combination of solutions would tackle the root problems of Social Security much better than a one-party fix.
Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.
The average Social Security benefit for retired workers is $1,417.22 per month, as of September 2018. This adds up to a total of just over $17,000 per year. How far that will get you depends on the cost of your living expenses. The Social Security Administration claims that the program is meant to replace about 40% of pre-retirement income for average earners, but it may cover more or less than that for you, depending on your pre-retirement earnings.
If youd been hoping for a little more help from the government in retirement, theres good news. There are things you can do to boost your Social Security checks and lessen the burden on your own retirement savings. Ill discuss these below, along with why you shouldnt rely too heavily on Social Security.
Your Social Security benefit is based on your average monthly earnings during the 35 highest-earning years of your life. If you havent worked for 35 years, then zeros will be factored into your score, which will bring down the average considerably. So one of the easiest ways to boost your benefits is to make sure youre working at least 35 years. More is even better, because then your lower-earning years will be replaced by higher-earning years, helping to raise your average.
You can begin claiming Social Security at 62, but you wont get your full benefit amount if you start this early. You dont become eligible for your full scheduled benefit until you reach your full retirement age. This is 66 or 67, depending on when you were born. If you start at 62 and have a full retirement age of 66, you will only get 75% of your benefit amount per check. Those with a full retirement age of 67 will only get 70% per check.
If you want the maximum benefit amount per check, consider delaying Social Security past your full retirement age. If you wait until age 70 to start claiming, you will be entitled to 124% of your scheduled benefit amount if your full retirement age is 67 or 132% if your full retirement age is 66.
You may have heard rumors that Social Security is going bankrupt. This is not true, but it is true that the trust funds for the program are slated to run out of reserves in 2034 unless changes are made. No one knows for sure what these changes will look like, but possible suggestions include reducing benefits, raising the full retirement age, and reducing the programs cost-of-living adjustments (COLAs), which help its value keep up with inflation. If any of these ideas are carried out, Social Security could lose some of its value and retirees will have to rely even more upon their own retirement savings to cover their expenses.
Its crucial that you understand how much you need for retirement and make regular contributions to your retirement accounts in order to keep yourself on track. Once youve estimated your retirement expenses, you can subtract what you expect to get from Social Security to figure out how much you need to save on your own. You can use the above average as an estimate or create a my Social Security account for an accurate idea of how much your Social Security benefit will be based on your work record.
If you want to be on the safe side, you should aim to save a little more than you think you need in case the value of Social Security does decrease. But the program is not going to go away. If you take the steps I mentioned above to boost your benefits and youre saving on your own, you may not have any trouble covering your expenses in retirement.
Kailey has been writing about personal finance since 2013. She does her best to keep it interesting and jumps at any opportunity to learn something new.