Social Security: Your Benefits Could Be Reduced in 2034
If you’re a millennial or member of GenX who has just started saving for retirement, you may want to ramp up your efforts now. A recent report revealed that Social Security benefits could be reduced as soon as 2034 due to a shortage of funding beginning.
The 2021 Social Security Trustees report revealed that beginning in 2034, retirees will only receive 78% of the full benefit they expected if Congress doesn’t find a way to fix the funding issues.
But what’s wrong with the Social Security program that needs to be fixed? And how can Congress take steps to fix it?
How Social Security Works
To understand how and why Social Security is broken — or, at least, cracking under pressure — it’s important to understand how the program works. Employers and employees split a 12.4% payroll tax on the employee’s first $147,000 of income. Self-employed individuals pay the full 12.4%.
For every dollar paid into Social Security, 85 cents goes into a trust fund that pays monthly benefits to current retirees and their families, while the other 15 cents goes into a separate trust that pays benefits to people with disabilities and their families, according to CNBC.
“You want to have the worker to beneficiary ratio at a sort of healthy level where you don’t have too few [working] people paying for too many beneficiaries,” Kathleen Romig, a senior policy analyst at the Center on Budget and Policy Priorities, told CNBC.
However, due to a drop in the birth rate following the baby boom, there are fewer people paying into the program. At the same time, longer average lifespans and increasing numbers of retiring baby boomers have created more beneficiaries. By 2034, reports say, the Social Security Administration will have exhausted excess reserves, which means reduced benefits for retirees at that time.
Social Security is a bipartisan program supported by 90% of all Democrats, Republicans, and independents based on a recent AARP survey, CNBC reported. It’s a crucial program to support older Americans in their retirement. And while it was devised to supplement other retirement income, the Center on Budget and Policy Priorities reports that half of seniors get 50% or more of their retirement income from the program.
Steps Congress Can Take
Congress has a few options to resolve the problem before 2034. It can reduce benefits, increase the retirement age or increase Social Security taxes. It’s an age-old budgeting problem. To eliminate a deficit, you have to find ways to spend less or earn more.
Congress was able to stave off this exact problem in 1983 by increasing the full retirement age from 65 to 67 and, simultaneously, taxing Social Security benefits as income.
The Social Security 2100 Act, introduced by Democrats in the House of Representatives, could have a similar result. The plan suggests applying payroll taxes to individuals making more than $400,000, adjusting the cost-of-living price index and increasing benefits for lower income workers. Taxing higher-income Americans would balance the benefit increase for lower-income retirees.
The legislation would require bipartisan support, and, according to the experts, a sense of urgency. However, “there’s no incentive on the part of the people in Congress to solve this problem before it is imminent,” Alicia H. Munnell, director of the Center of Retirement Research at Boston College, told CNBC.
What You Can Do To Prepare
Congress stepped in just in the nick of time back in 1983 to solve the Social Security problem. But American taxpayers today may not want to take that chance again. Set a goal to set aside retirement income through investments based on your age and risk tolerance. Studies from Chase Bank and other financial experts recommend that you plan to replace 80% to 90% of your working income in retirement, although this amount could be smaller if you are entering retirement debt-free and with no mortgage payments. On average, 40% of retirement income comes from Social Security benefits, according to the Social Security Administration, but you may want to plan for a worst-case scenario and look to set aside more money.
Speak to a financial advisor to help you evaluate your budget and determine the best course of action to jumpstart your retirement savings. You’ll have the peace of mind of knowing your future won’t be determined by the government’s action — or inaction. And if Congress does fix the Social Security conundrum before 2034, you could have extra savings to live it up in your later years.
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