By K. Bridget Schneider, CFP®, CRPC®
There have been many articles written recently about the future of Social Security and its ability to continue paying benefits. Projections show that in a year or so Social Security will need to draw on its trust fund to make payments to retirees. Talk of the trust fund being depleted may cause you to question if Social Security will be available when you retire. And should you prepare for a future without Social Security?
The Worst-Case Scenario
Social Security was created in 1935 and has been providing a retirement income to qualifying individuals since 1940. It was originally designed to provide less than half of your current income. But there are some people that depend on it for most of their retirement income. If nothing is done by our legislators, some estimates show that the trust fund will be depleted in 15 years. At that time benefit payments would need to be lowered by 20% to 25% to continue payments to all beneficiaries. So, while a benefit stream could continue, that reduction would be devastating to many households.
Increases to the Payroll Tax Rate
If benefits aren’t cut, then tax revenue for the program will need to increase. One way to do that is to increase the payroll tax rate. Another option is to raise the level of earnings subject to taxation. In 2019 the wage limit subject to payroll taxes for Social Security is $132,900. To help the trust fund remain solvent, that limit would probably have to be much higher or removed entirely so that all income would be subject to the payroll tax. This change would only affect people whose earnings over the limit currently avoid the Social Security payroll tax.
Increasing the Full Retirement Age
Increasing taxes isn’t popular, so Congress may be more likely to raise the full benefit retirement age to help secure the future of social security. That means younger generations will have to work longer before they can start collecting benefits. It wouldn’t be the first time this has happened. Changes made in 1983 caused the full retirement age to gradually rise from 65 to 67.
Lower Cost-of-Living Adjustments
Another change to help the future of Social Security might be to lower the Cost-of-Living Adjustments (COLAs). These COLAs are based on the Consumer Price Index and allow for a slight increase in benefits to help keep pace with inflation. If COLAs are lowered, benefit checks won’t increase as much as inflation does. However, people who depend heavily on Social Security may need to find ways to lower their spending to make ends meet.
What Can You Do?
If you’re currently in the workforce, you may wonder how the future of Social Security benefits will impact your plans for retirement. Luckily, one way to offset a lower Social Security benefit can be found in the workplace. Check out the linked information for two ideas below.
Besides increasing your retirement savings options, it is also important to understand your Social Security claiming options. There is no perfect strategy, but utilizing options such as waiting before taking your benefits can help you get more out of Social Security.
Preparing for the Future
While the future of Social Security is yet to be determined, a good retirement plan should consider both the knowns and unknowns. You can take steps now to offset the risk of a reduction in Social Security benefits. If you have doubts about your retirement planning, I suggest enlisting the help of a CFP® Professional. By working with a qualified financial advisor to develop an effective strategy, you may achieve a comfortable retirement without depending on Social Security for most of your income.
As your friendly financial guide and ally, we can help you review your investment strategy, understand your claiming options for Social Security, or structure a retirement plan that makes sense for your unique situation. For more information on financial and retirement planning, visit our website today, call us at 217-605-8130, or click here to schedule a free, no obligation consultation.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual, nor intended to be a substitute for specific individualized tax or legal advice.