Social Security - and its security as a social welfare program - is a hot topic every election year. The clock is ticking to the end of the current program's solvency. The need to make politically tough changes to keep it afloat, combined with the dearth of retirement savings and numbers of baby boomers retiring now, can and should make all adults worried about Social Security and money for retirement.
A March 2018 Gallup poll showed that 51 percent of pre-retirees ages 50 to 64 are concerned about the program's viability. While the numbers dropped with age, even 33 percent of millennials expressed worries. With the Social Security facing a multi-trillion-dollar shortfall in the not-too-distant future, more people are recognizing that fixing the issue has two main solutions: cut Social Security benefits or raise payroll taxes on those still working.
Either of those solutions, however, still leaves retirees too dependent on Social Security. A better solution is acknowledging the need to boost savings and rely less on a government program never intended to be a complete retirement plan.
The Problems with Social Security
Since being founded over 80 years ago, Social Security collected an estimated $20.9 trillion, of which it has paid out $18 trillion. There are actually two main parts to Social Security: The Disability Insurance Trust Fund, which provide benefits for the disabled, and the Old-Age and Survivors Insurance Trust Fund, which pays retirement and survivor benefits. Both elements will deplete their reserves, which are kept separate, in about 15 years.
Contrary to popular myth, Social Security cannot go broke as long as there are still people working and paying payroll taxes. However, with no reserves, the incoming taxes in a pay-as-you-go system will not cover needed outgoing amounts. If nothing is done legislatively, the Disability Trust Fund will only have enough money coming in to cover 96 percent of benefits starting in 2032. The other program is far worse off. Starting in 2034, without more money coming in, the Old-Age and Survivors Fund will have to cut Social Security benefits and only pay 77 percent of current entitlements.
While Social Security is supposed to help retirees and their surviving spouses make ends meet, it was never supposed to be their sole income source. It was reportedly designed to replace an estimated 40 percent of pre-retirement income for typical, i.e., not highly paid, workers. Yet, one-third of recipients rely on their benefits for at least 90 percent of their income. An estimated 62 percent of beneficiaries rely on Social Security for half their income.
The average Social Security benefit for a retired worker in early 2017 was $1,355, or $16,260 a year. That amount does not replace 40 percent of pay for most people and puts those heavily dependent on it below the poverty level. (For those curious, the maximum possible payout at full retirement age was $2,687 in 2017.)
How to Fix Social Security
Cutting Social Security benefits is a dire solution, given how little monthly payments are for most. So, the alternative is likely to be a politically unpopular tax increase. Employees and employers currently each pay 6.2 percent of wages in Social Security taxes as well as additional amounts for Medicare. (Those self-employed pay the whole thing.) According to the Government Accountability Office, the projected financing shortfall over the coming decades is 2.66 percent of taxable payroll. Therefore, a 1.33 percent hike in Social Security taxes for both employers and employees could solve the issue but is not likely to go over well with businesses or millennials footing the bill for seniors.
Some have proposed increasing Social Security taxes on higher-paid workers. In 2018, the maximum earnings cap for Social Security taxes was raised from $1,500 to $128,700. That change means a tax increase of $93 a year ($186 for those self-employed). Raising it even higher will clearly not accomplish much.
How Can I Have a Secure Future?
While it is likely that Social Security will still exist in the coming decades, the best solution for those still in the workforce involves working longer, starting Social Security payouts as late as possible and making saving a top priority.
Research shows many people expect to retire around the age of 68. However, a study released in 2015 showed that 60 percent of those retired or semi-retired did so far sooner than planned. Often, this was due to layoffs, early retirement incentives and career dissatisfaction. Many look toward a phased retirement and maybe doing something different for less money before quitting entirely. However, assuming you will earn a steady income in the late 50s and 60s is not wise. Ideally, your retirement preparations should reflect plans for working as long as you would like and having to stop early because of job loss or health. That way, you are prepared with contingency plans.
Delay Social Security
Maximizing the benefits payments is critical for those who will rely heavily on the monthly income in retirement. That means delaying filing for benefits until age 70. For someone whose full retirement age is 67, waiting until age 70 to file for Social Security increases the amount received by 24 percent (8 percent for each year delayed). That 24 percent jump is paid monthly for the rest of the recipient's life. Conversely, filing early - at age 62 or even 65 - results in permanently reduced benefits going forward.
Start or boost your savings now
Cutting costs and shoring up savings now is the way to protect your future and avoid being reliant on Social Security. Regardless of whether benefits are reduced or remain the same, having other money to live on is important. Whether through a 401(k) or comparable benefit plan at work or an individual retirement account (IRA) on the side, enhancing ones saving, even by a little bit monthly, can make a difference. Also, remember that yearly contribution limits for IRAs and 401(k) plans are higher for those over age 50.
It helps to have a clear picture in mind of what options exist. GuidedChoice has a 401(k) advice and management service that helps people model different scenarios affecting their future retirement income, with and without Social Security. This allows users to see the impact that decisions and changes in savings can have on their future.
Additionally, GuidedChoice can help you manage your 401(k) to better meet your goals to smartly build assets to replace income later on. That service advises users on ways to allocate their fund choices to maximize growth and minimize risk.
Social Security is an important supplement for retirement income but should not be the only tool in a future retiree's economic arsenal. Consider other ways to ensure a brighter financial future. Check out our website today for more information on retirement planning.
Forbes: Retirement Reality Check: Retirees Surveyed Stopped Working Earlier Than Expected
Gallup: Adults Nearing Retirement Worry Most About Social Security
Social Security Administration: Fast Facts 2017
Social Security Administration: The 2017 Annual Report of the Board of Trustees of the Federal Old-Age ...
USA Today: Who is worried about the future of Social Security? Pretty much everyone
Washington Post: Worried about cuts to Social Security? Here's the bible on navigating this retirement benefit