By Kristen DeLotta
With frequent headlines warning about Social Security’s potential insolvency, you might be asking yourself if it will even be around for you at all. Are your concerns justified?
Current State of Social Security
Based on our current trajectory, Social Security funds are expected to run out by the year 2035. After that, it’s expected that the fund will only be able to cover about 78% of scheduled benefits unless changes are made. It’s important to understand that Social Security will not run out entirely because of how it is funded. The program receives continuous funding from payroll tax deductions. That means even if all reserves were depleted, $780 of every $1,000 would still be paid from current payroll FICA taxes. The current workforce pays for the current retirees’ benefits.
Historical Context
Social Security has endured numerous financial challenges and modifications since its inception in the 1930s. In the 1980s, similar solvency concerns arose, prompting legislative reforms that extended the program’s solvency. This historical precedent shows that while concerns are valid, they are not insurmountable. Adjustments are made to adapt to the needs of each generation. Policymakers have previously acted to ensure the continuation of Social Security, and they are likely to do so again.
Potential Changes
Several proposals to combat the shortfall of Social Security funding are as follows:
Raising the retirement age: Increasing the retirement age to adapt to higher life expectancy.
Increasing payroll taxes (FICA): Raising the payroll tax rate, which can increase income to fund the program.
Adjusting the payout formula: Modifying how benefits are calculated to lower payouts.
These changes aim to improve the program’s solvency but may also impact future benefits. For instance, raising the retirement age means individuals would have to wait longer to receive full benefits. Increasing payroll taxes could affect current workers’ take-home pay.
How to Prepare
If you’re in your 50s approaching retirement, it’s essential to start preparing for potential changes to Social Security. Focusing on your retirement savings by contributing as much as you can to IRAs, 401(k)s, or other investment accounts can help reduce the gap that may be created if benefit levels are reduced.