Social Security has become a political football ahead of the 2022 midterm elections, with President Joe Biden warning that Republicans might try to sunset the program and Republicans countering that they plan to save and strengthen it.
What’s known for sure is that Social Security is expected to become insolvent around 2034, according to the Social Security Administration’s most recent annual trustees report. In that report, the SSA said the Old-Age and Survivors Insurance Trust Fund — which pays retirement and survivors benefits — will “be able to pay scheduled benefits on a timely basis until 2034, one year later than reported last year.”
Based on the current trajectory, the fund’s reserves will then become depleted, and continuing tax income will be sufficient to pay only 77% of scheduled benefits. The shortfall is mainly due to the combination of retiring baby boomers and lower birth rates, which will lead to a smaller supply of workers and less tax revenue.
That doesn’t mean the program is going away, however. Social Security will continue to be funded through payroll taxes, so there’s almost no risk that benefits will disappear completely, Motley Fool reported. But benefits might have to be reduced — meaning lower monthly payments for Social Security recipients in the decades ahead.
A recent study from HealthView Services found that millennials alone could lose hundreds of thousands in Social Security benefits. According to that study, 35-year-olds currently earning between $50,000 and $150,000 a year would see a decline in future lifetime benefits of between $365,000 and $675,000. This assumes benefit claims are made at the current full retirement age, the retiree lives to the average age, and annual cost-of-living adjustments follow historical patterns.
Among generational cohorts, boomers will feel the least impact from Social Security cuts because most are either already retired or have reached the age when they are eligible to apply for Social Security benefits.
As GOBankingRates previously reported, 40% of boomers expect Social Security to be their primary source of retirement income, according to a new survey from the Transamerica Center for Retirement Studies. In contrast, nearly three-quarters (73%) of millennials and Gen Z said they are concerned that Social Security will not be there for them when they are ready to retire. An even higher percentage of Gen X respondents (78%) said the same thing.
Boomers who are worried about the future of Social Security might be tempted to go ahead and apply now so they can start collecting benefits before they are reduced. But if you have yet to reach full retirement age — 66 or 67, depending on your birthdate — you still might be better off waiting. Waiting as long as you can means you’ll get a higher monthly payment.
Here’s a rundown of the maximum monthly payment in 2022, according to the SSA:
- Collecting Social Security at age 62: $2,364
- Collecting at full retirement age: $3,345
- Collecting at age 70: $4,194
For all other generations, the best strategy is to put as much money as you can into 401(k)s and other retirement accounts. Thanks to a recent IRS change, the maximum 401(k) contribution will rise to $22,500 in 2023 from $20,500 in 2022. The same increase applies to 403(b) plans, most 457 plans and the federal government’s Thrift Savings Plan. The catch-up contribution limit for employees 50 and over increases to $7,500 in 2023 from $6,500 in 2022.
Workers in the Gen X, millennial and Gen Z demographics are advised to contribute at least enough to their 401(k) accounts to meet employer matches. Beyond that, they should aim to invest 10% to 15% of their paychecks into a retirement plan, CNET reported.
The best course of action is to contribute the maximum if you can pull it off financially. This is especially beneficial to younger workers because of the amount of retirement savings you can build up over time.
“In your 20s and 30s, the compounding of the extra savings could be significant by the time you retire,” Lisa Featherngill, national director of wealth planning at Comerica Bank, told GOBankingRates in an email.
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