On June 1, the US Social Security Administration announced that its trust funds can pay all Social Security funds through 2035 — one year later than originally expected.
After that date, the Social Security Administration (SSA) says payments are likely to be reduced to nearly 80% if Congress doesn’t step in and provide a subsidy for the program, according to the board.
in addition to, The Aging and Survivors’ Insurance Trust, which funds retirement and survivors’ benefits, will be depleted by 2034. After that date, 77% of assessed benefits will be paid to U.S. retirees.
The SSA Disability Insurance Trust saw some good news as the trustees noted that the program, which pays disability benefits to eligible Americans, is now able to pay full benefits after 2057, the date that program administrators estimated the funds would be exhausted.
The combined asset reserves of the OASI and DI joint trust funds total $2.852 trillion, down $56 billion, with some serious funding issues on the horizon.
“The program’s total annual cost is expected to exceed total annual income in 2022 and to remain higher throughout the 75-year forecast period. Total cost began higher than total income in 2021, the Sub-Saharan Administration said in a June 2 statement. “The cost of Social Security has exceeded non-interest income since 2010.”
“The year in which pooled trust fund reserves are expected to be depleted, if Congress does not act before then, is 2035 — one year later than last year’s forecast,” the Social Security Administration added. “At that time, there will be enough income that will come in to pay 80% of the scheduled benefits.”
Red flags and dangers
Financial experts say the Social Security agreement does a good job of clarifying the realities of program financing, but they see potential risks ahead.
“While the SSA announcement is good news, it is important to remember that the long-term future of Social Security is not assured,” said Michael Ryan, financial advisor and founder of financial education website MichaelRyanMoney.com.
The program faces a number of challenges, including retiring boomers, extending life expectancy, and declining birth rates. If these challenges are not addressed, the program could face bankruptcy in the future.”
According to Ryan, one of the main factors that determine the longevity of Social Security benefits is the health of the economy.
“If the economy is strong, there will be more revenue coming into the Social Security Trust, which can keep payments for a longer period of time,” he said. “However, if the economy weakens, these revenues will decline, putting pressure on the trust.”
Another factor that can affect the longevity of Social Security benefits is demographics. “As the baby-boom generation begins to retire, there will be more people withdrawing their money from the trust,” Ryan noted. “This increased demand can strain the system, leading to lower payments or even complete depletion of the trust.”
Action steps for Congress
Many Americans don’t quite understand what the Social Security Agreement means when it says 2034 is the last year estimated for 100% program funding payments.
“Some believe that all Social Security benefits should automatically decline on this date and that there is no solution to the problem,” said Doug Carey, chartered financial analyst and president of WealthTrace, a financial planning software company. “But that’s not true. Congress can still support the fund by raising taxes or increasing the age at which benefits start. Although it’s unlikely we can do anything in the short term, they will have to address this as 2034 approaches.”
In the meantime, there are a few steps Congress can take to alleviate the Social Security payment shortfall. Those three steps, Carey said, are at the top of that list.
1. Increase the amount of salary income that can be taxed for Social Security. “Currently the payroll limit for Social Security payroll taxes, which splits 12.4% between employer and employee, is $147,000,” Carey said.
2. Social Security taxes increased by 12.4%.
3. Changing how Social Security funds are invested. “They are currently investing 100% in US Treasuries and are earning less than 2% annually, which is lower than inflation and means the real rate of return is negative,” Carey added.
What you can do to prepare
While the ball is in Congress’s court on Social Security financing, individual recipients can take some steps of their own to increase their Social Security earnings in the future.
“One of the most important things is to start planning early,” Ryan said. “It’s never too early to start thinking about retirement and how you’ll generate income during that time.”
Make sure you’re contributing to a retirement account like a 401k or IRA to build a solid retirement savings platform outside of Social Security. “The earlier you start saving, the more time your money should grow,” Ryan noted. “Employers often make matching contributions, so it is important to capitalize on that if possible.”
Another method for financial security in retirement is to play your “late” card.
“If you think Congress is really going to prevent Social Security from cutting benefits, delaying getting benefits until age 70 is the best strategy for a lot of people,” Carey said. “There is a life expectancy where delaying getting Social Security makes sense.”
This age is 80 for most people. Thus, if you think you will live past the age of 80, it may make sense to delay getting Social Security. “This break-even occurs because those who delay until age 70 receive 24% higher payments,” Carey added.
In addition, many spouses may not know that their spouse can receive half of their full retirement age benefits.
“For example, if one spouse works and the other doesn’t work much or at all, the difference in Social Security benefits earned can be significant,” Carey said. Let’s say one spouse’s benefits are $36,000 per year and the other only $10,000. A spouse who has an annual benefit of $10,000 must not claim his/her own benefit. He or she should claim half of the spousal benefit, which would be $18,000 annually.”
It’s a good idea to run these scenarios through a comprehensive retirement plan to see if the delay makes sense.
“Sheets and most free Social Security calculators are not enough because they do not take into account all the complex and interactive factors that go into such an important decision,” Carey said.