As baby boomers continue to retire, it seems like Social Security is always top of mind and in the news.
But that’s not surprising. According to the Social Security Administration, Social Security benefits make up around 33% of total income for the elderly.1 Social Security has become a crucial part of being able to afford retirement.
So the program’s solvency is just as crucial.
Each year, the Social Security and Medicare Boards of Trustees publish a report on the financial status of those two programs. The 2020 version of the report projects that the costs of Social Security will continue to outpace what the program takes in annually, so that by 2035 the program will be able to pay out only 76% of scheduled benefits.2
Reports like this strike fear into the hearts of many Americans, especially those over the age of 50. The monthly volume of Social Security-related terms entered into search engines is very telling. Searches for phrases such as, “is Social Security running out of money,” “will Social Security be around in 30 years,” “will Social Security be around when I retire,” “what happens when Social Security runs out,” and “will Social Security end” number in the collective thousands every single month.3
Why is Social Security running out?
As of the end of 2019, Social Security built up a surplus of approximately $2.9 trillion.4 But that surplus is projected to run out by 2035. Why? Because more people are retiring and living longer, meaning that the cost of paying annual benefits will exceed the amount of annual income Social Security receives, so the $2.9 trillion surplus will be used to fund that deficit for the foreseeable future.
In 1940, the life expectancy of a 65-year-old was almost 14 years, but in 2020 that number has increased to just over 20 years.5 What’s more, the U.S. is projected to grow its number of Americans 65 and older from 56 million in 2020 to over 78 million in 2035.6
Birth rates have also dropped, so there are fewer workers paying into Social Security to make up for more people withdrawing Social Security benefits.
But will Social Security completely run out?
This has happened before
In 1983, Social Security was projected to stop paying full benefits — prompting Congress to take action. They made two significant changes to increase the amount of money coming into Social Security.
One was to raise the full retirement age, which is the age at which you qualify for 100% of your Social Security benefits, from 66 to 67 (they did so with a gradual implementation by birth year,7 but we won’t get into those details here).
By doing so, those who wanted to retire earlier accepted a reduced benefit amount, and those who wanted to receive their full benefit amount either 1) stayed in the workforce longer and continued contributing to Social Security until they reached full retirement age, or 2) retired but did not apply to start receiving Social Security benefits until they reached full retirement age.
The other change was to begin taxing 50-85% of the Social Security benefit amount, depending on the recipient’s level of income.
Both of these changes have helped lead to the $2.9 trillion surplus mentioned earlier. But now that we know that surplus will likely run out by 2035, what’s next?
What needs to happen to prevent Social Security from running out?
Congress will need to take action to ensure Americans continue to receive 100% of their Social Security benefits. But they have different options to choose from.
They could potentially raise the retirement age again. They could increase the taxes on Social Security benefits broadly across all recipients, or focus more on taxing higher earners.
They could even do something new, such as increase the payroll tax that funds Social Security, or further increase the maximum taxable earnings amount. Currently, employers and employees each pay taxes on 6.2% of wages, and self-employed individuals pay 12.4% of wages, up to a maximum of $137,700 of earnings in 2020 ($142,800 in 2021). Increasing the tax rate and/or maximum taxable earnings amount would help offset the benefits deficit.
Another option is changing the eligibility requirements to qualify for Social Security benefits. Right now, you need 40 credits (or 10 years) in a job that pays Social Security taxes to qualify for retirement benefits.8 Congress could consider raising the credit requirement to elongate workforce participation.
None of these options are necessarily going to be very popular, and it’s impossible to predict exactly what Congress will do, or when they will take action. The important thing to consider is that Congress has taken action before to save Social Security, and they will likely do so again before we see any reduction in benefits.
Combatting a couple more Social Security misconceptions
Many individuals don’t wait until their Social Security full retirement age (between 65 and 67 depending on birth year) to retire. Some may choose to retire at 62, and others at 65. The important thing to know is that you do not have to start collecting Social Security benefits right when you retire. You can delay claiming your benefits until you reach full retirement age or older. In fact, by doing so, you would increase the monthly amount you receive. Every year you defer claiming Social Security from ages 62 to 70 could increase your benefit amount as much as 8% annually.9 If you claim benefits before your full retirement age, you will not receive the full amount you are entitled to.
Another common misconception people have is around annual cost-of-living adjustments (COLA). If Social Security is running out, does that mean those who currently receive benefits will stop receiving annual increases? Actually, these increases are mandated by federal law, which dictates that Social Security amounts increase by the same percentage amount as the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) increased in the prior year. Therefore, the only way Social Security would not get an annual boost is if the CPI-W also stayed flat.
For example, in 2020 the CPI-W saw an annualized increase of 1.3% from Q3 2019 to Q3 2020. Thus, the 2021 Social Security COLA is 1.3%.
What can you do next?
Planning should be your number one step. Understanding what your income needs in retirement will be, what your existing assets are and how to bridge any gaps is critical to living the retirement lifestyle you desire. You may not necessarily have to rely on Social Security right away. Retirement accounts, annuities, pensions, and other assets or sources of income can help you retire and defer claiming Social Security benefits until you qualify to receive a higher amount.
Working with a financial advisor can be the key to laying out a successful plan. They’ll help you look at your anticipated costs and cash flows and determine how best to incorporate Social Security benefits in to your retirement income plan. The earlier you start planning, the more flexibility you will have, so contact an advisor today to start looking at your full financial picture.
- Divorced and over 50: What women should know about Social Security
- Does gender affect Social Security? (Part I)
- Does gender affect Social Security? (Part II)