The Future of Social Security
The Social Security program’s financial security is under constant observation and management by the Social Security Administration. They adjust various factors to ensure its long-term sustainability. However, it’s many reports indicate that it will suffer a severe benefit reduction in 2033.
For this reason, it’s absolutely no surprise that most millennials have stated they won’t be factoring Social Security into their financial strategy for retirement. After all, they’ve been hearing for several years now that the retirement and disability program is going to break down. This belief isn’t unfounded. It’s based on a number of predictions. As an example, take a look at the most recent Social Security Trustees Report. It tells us that Social Security’s trust fund reserves will be depleted by 2033. This is one year earlier than what they estimated last year.
Although, some people, especially younger Americans, have some misunderstandings about what the impact will be if the trust fund does indeed bust. Firstly, it’s important to remember that this prediction is by no means certain. And, even if the trust fund does deplete, the program will still be able to pay the majority of benefits. A number of people have misinterpreted reports, believing that Social Security will become completely bankrupt. They think they won’t receive any benefits at all. However, this is absolutely not the case.
How It Would Affect You
Still, though, what would happen if the trust fund does end up running out of money? Well, the program’s 67 million beneficiaries would experience a benefit cut. And, according to experts, those cuts would have a significant impact on millions of older Americans. If the trust fund is depleted, there’d be an immediate drop in benefits, by as much as 25%. The Social Security benefits paid to lower-wage earners represent a bigger share of their earnings. Because the system is designed the way it is, a drop would hit low-income Americans the hardest out of anyone.
“Currently, retirees who were low earners while working — defined as earning about $30,000 a year while employed — get about 50% of their income replaced from their Social Security benefits. But that would drop to about 40% of replacement earnings in 2033 if the trust fund runs out of money.” High earners, meanwhile, would have their replacement rate drop from 25% only down to 20%.
Presently, it seems very likely that the Social Security trust fund will run out of money in 2033. However, it might not, assuming lawmakers are able to prevent it. Proposals from Democrats, Republicans, and bipartisan committees alike all exist, made in an attempt to handle this issue.
“Republicans have proposed pushing the retirement age up to 70, effectively cutting between 2 to 3 years of benefits for today’s workers.”
When Should You Start Social Security: Then Vs Now
Many financial analysts suggest that the ideal age to start Social Security benefits at is age 70, the latest you can possibly delay it to. However, this conclusion is based on the assumption that benefits won’t be reduced in the future: With the benefit reduction in mind, your best course of action changes.
When you should start taking Social Security depends on your own individual situation. One way to figure this out is with Open Social Security, a free online tool to analyze optimal claiming strategies.
It’s important to note, Open Social Security uses a system based on the assumption that people with live to their expected lifespans. For those who unexpectedly live longer, it’s recommended that they delay the start of benefits more than they would otherwise. Unfortunately, you of course can’t predict longevity.
Examples
First of all:
Let’s say there’s a married couple, a man and a woman who are both turning 26 years old this year. For them, the ideal strategy is for the husband to start Social Security benefits at age 70. The wife, meanwhile, should start them a month after turning age 62.
Next, a single man turning 62 this year. He should begin Social Security eight months after turning 67. However, the assumed benefit reduction would change this. If the benefit reduction happens, the recommended choice for him would be to start taking Social Security right away.
For a single woman turning 62 this year, the recommendation was previously eleven months after turning 68. But, assuming the benefit reduction occurs, her recommended filing age is 27 years and seven months.
One factor though, that you need to consider in all of these analyses, is that no matter what age you claim Social Security at, you’ll only be getting three-quarters of your benefit amount. You won’t escape the benefit reduction. But, it’s better to get only three-quarters of a larger benefit than of a smaller one: You can make the best of a bad situation.
We Can Help
Social Security won’t keep you completely covered in retirement, anyway, regardless of what you do. In essence, it only accounts for around 40% of the income you’ll need to get by in retirement. Statistics show that you’ll need an income resource providing you with 70% to 80% of what your income was when you were working. What can you do to make up the difference and provide yourself with the rest of the necessary income?
Fortunately, there are ways of doing just this. If you’re looking for some alternative ways of providing yourself with a source of retirement income, get in contact with us. If you’re worried about if you’ll have enough to retire, get in touch with us to learn more. And remember, American Principal is always here to help.
