President Franklin D. Roosevelt signed the Social Security program into existence in 1935. In the world of retirement planning and wealth management, Social Security has come to be the cornerstone for tens of millions of Americans. This retirement benefit comes in the form of a monthly check that replaces part of your income after you begin working less or retire.
Benefits are funded through Social Security taxes. The Social Security Administration computes benefits based on your earnings history and your age when payments begin. The earliest someone may claim Social Security retirement benefits is age 62. Claiming at age 62 or anytime before Full Retirement Age will result in reduced benefits. (Full Retirement Age is between ages 65 and 67 based on a person’s year of birth. For most unretired workers presently, it is between age 66 and 67.)
For every year beyond Full Retirement Age one waits to receive benefits, the monthly payout will increase by 8 percent. If financially capable to defer claiming benefits, this decision could provide a much more significant sum of benefits down the road. Often the decision of when to claim benefits is based on one’s life expectancy, plans about how long to work, and other personal financial considerations.
Despite the decades-old program’s historic stability, the Social Security Trustees project that Social Security may be unable to pay every scheduled benefit starting in 2034. Demographic shifts and an aging population are placing strains on its longevity. However, we believe the program should remain intact for current and future beneficiaries.
Many fears surrounding the depletion of the Social Security trust funds by 2034 are unfounded. Even then, Social Security will not cease. Rather, it will continue to collect taxes and provide benefits. According to the most recent estimates, the program will still bring in enough to pay 80 percent of scheduled benefits.
The last time the program nearly depleted its funds was in 1983. Congress then took steps to prevent a collapse. There are a few arrows in Congress’ quiver that could once again be used to prolong the program’s lifespan.
One of those options is adjusting the cap for taxable income. According to the Social Security Administration, eliminating it would keep the fund solvent until 2060. Increasing the payroll tax rate or broadening the definition of what types of income can be taxed are other possible avenues.
In contrast to taxation, there could also be reductions. These alternatives include reducing benefits for the newly retired and/or increasing the retirement age for younger workers. These options would likely be a gradual change for future generations just as it was done in the past.
A final – though unlikely – option would be for the program to consider investments besides U.S. Treasuries. Expanding the program’s allowed investment types could deliver higher growth over time. In short, policymakers have a range of strategies at their disposal to ensure its future sustainability.
Despite confidence that Social Security will endure, smart retirement planning considers various retirement income sources. Social Security was never intended to be the only source of later-life income. Diversifying your retirement savings through personal investments or employer-sponsored retirement plans is prudent personal financial planning.
Our team at BCS Wealth Management is here to help if you have questions about your Social Security benefits, the timing of those benefits, or any other retirement planning concern that may weigh on your mind.