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Is Social Security Sustainable?

If you pay attention to the news, you may have heard the negative predictions about the sustainability of our Social Security fund. For example, a recent Social Security Survey reports that three-quarters of people over the age of 50 expect the program to run out of money in their lifetime, and around 40% of younger generations (like Gen Z and Millennials) believe they will not receive a single penny from the program. 

While this may seem alarming, it’s crucial to look beyond the headlines and understand the underlying challenges the program faces. Changes certainly need to be made, but keeping a realistic perspective is important to making wise financial decisions. Keep in mind, Social Security is only one component of retirement. To help bring some clarity to the situation, let’s look at some of the concerns about Social Security’s sustainability, discuss potential solutions, and provide insights on how you move forward with a plan for your retirement. 

Concerns About Social Security’s Sustainability

The fears about Social Security are not unfounded. According to the most recent Social Security Trustee report, the Social Security Trust Fund will be completely depleted by 2034, one year earlier than previously thought. 

With that said, does that mean that no benefits will be paid out after that point? No, not at all.

Currently, Social Security benefits are paid for via a combination of distributions from the trust fund, as well as payroll taxes. If the trust fund were depleted by 2034, then payroll taxes would be able to cover approximately 77% of Social Security benefits. 

If that were to happen, with no changes to the program in the meantime, then people receiving Social Security benefits would experience a pretty significant pay cut. While neither I (nor you) have a crystal ball, we’re far more likely to see changes to the program, as opposed to a 23% pay cut that would hurt all the retirees in this country.

How Social Security Might Cover the Shortfall

At its core, the challenge of maintaining the solvency of Social Security boils down to two relatively simple strategies: raise more money (by increasing taxes) or cut benefits. Will we need to do one of these strategies entirely? Probably not. Most likely it will be some kind of compromise. But here are a few ideas that have been brought forth as solutions to fund the gap we’re facing:

Raise Taxes

1. Increase Payroll Tax Rate: A proposal to raise the payroll tax rate from 12.4% to 15.5% in 2034 offers a significant potential to bridge the financial gap. While this shared increase between employers and employees could help cover a good amount of Social Security’s solvency gap, it isn’t realistic for many lower-income Americans. A gradual increase would be less disruptive. 

2. Adjust the Taxable Maximum: Presently, only wages up to $168,600 are subject to Social Security tax. By either increasing this cap, eliminating it, or introducing a tax on higher earnings tiers, the system’s shortfall could shrink. If all earned income was taxed, this would tackle a major portion of the solvency shortfall.

3. Create New Tax Sources: An additional revenue stream to fund Social Security could be created by taxing additional sources of income, such as investments, or increasing estate and gift taxes. This has not been done before and may face opposition from taxpayers. 

Cut Benefits

1. Raise the Retirement Age: The concept of gradually raising the retirement age addresses the reality of increased life expectancies. The proposition involves extending the retirement age by two months annually until it reaches 69, after which it would be indexed to life expectancy, essentially adapting to shifting demographics. While the early retirement age of 62 would remain unchanged, beneficiaries would need to wait longer to receive their full benefit. 

2. Reduce Benefits for High-Earners: The strategy behind this is to focus on offering more substantial benefits for lower-income and middle-income earners, and progressively reduce benefits for higher incomes. 

3. Increase the Number of Earning Years for Benefit Calculation: Currently, Social Security determines benefits based on an individual’s top 35 earning years. By extending this time frame to 40 years, the inclusion of additional low- or zero-earning years could reduce the average benefit amount.

When Should You Take Social Security?

Given the potential changes to Social Security in the next decade, making a well-informed decision about when to claim your benefits has become even more crucial. While some people may want to claim as soon as they’re eligible at age 62, often driven by concerns about the program’s solvency, that may not be the best solution. Waiting until full retirement age or beyond can increase your monthly benefits, perhaps substantially. For high earners particularly, delaying may help mitigate some of the impact of potentially reduced benefits. 

Moreover, several other factors, like life expectancy, health status, employment opportunities, and other retirement income sources, can help inform this critical decision. And those factors may be just as, or even more important, than the potential changes to Social Security. 

It’s essential to personalize this choice based on your unique circumstances, possibly with the assistance of a financial advisor, to maximize your lifetime benefits and help you enjoy your retirement.

We Can Help You Prepare for Life’s Transitions

It’s easy to let the bad news media hype create fear and doubt. While it’s important to stay informed, it’s even more important to have a solid financial plan so you are prepared for any potential changes.

At Black Walnut Wealth Management, we help you avoid potential unseen financial missteps by taking a proactive, comprehensive approach to wealth management. If you are an individual, family, or business owner in northern Michigan looking to partner with a trusted advisor who can coordinate your financial life while you focus on what matters most, we would love to connect and see how we can help. Schedule a 15-minute introductory meeting by calling us at (231) 421-7711 or using our online calendar

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