Broker Check

Will Social Security run out of money?

| January 23, 2018
Share |

During retirement, most of us will receive our income from a variety of places. Some of us will receive pensions. Many of us will receive/generate income from our retirement savings. Most or all of us will receive some benefits via Social Security.

Social Security is a federal system dedicated to supplementing a portion of retiree’s income and disability income for those who qualify. This federal system began in 1935 and is funded via a percentage of our paychecks.

Every working person will pay into the system over their lifetime. Unfortunately, the number of retired persons versus the number of working individuals is lopsided, with retirees in the majority. Over the next decade or two, this discrepancy will increase. This means that the dollar amount going into the system will dwarf in comparison to the amount paid out as benefits.

Social Security currently has a reserve that has been accumulating over the years. This reserve is where current Social Security funding gets paid to and where all benefits are paid from. Due to the growing difference between benefits being paid out and funding going in, this reserve is set to run out.

Experts have done the math and determine that the Social Security reserve will run out in 2034, at which point the benefit amount being paid out will be reduced to 79% of the entitled benefit. This is an important point.

Though the reserve is set to run out, benefits will continue to be paid, it will decrease the amount initially promised.

This is an enormous problem for our country, but what can be done.

Government Action

There are several proposed solutions to this problem.

  1. Full retirement age can be moved – The current full retirement age ranges from 65 to 67, depending on what year you were born. To accommodate the lack of funding for the program and how long we are now living, this could be pushed back a year or more.

 

This would delay when some people will receive benefits and shorten the amount of time that benefits are paid out to any one individual – the later you start collecting, the less time there is to pay out benefits.

 

  1. Increase payroll tax – This would effectively increase the percentage that each paycheck is taxed for Social Security. Currently, it is 6.2% for individuals and another 6.2% for employers. By increasing this amount, there is an increase in Social Security funding.

 

  1. Increase the amount of earnings eligible for taxation – There is currently a limit at $127,200; meaning, income earned over this amount does not contribute to Social Security. An increase in this amount will definitely increase the amount going into the system.

Personal Action

All of these options will be unpopular with most voters. Why should they be taxed more or wait longer to receive their benefits if they won’t receive all of what they paid in any way? Getting any of these changes made will be difficult for our current legislation. They would rather appeal to the populous and get re-elected, rather than create legislation that would benefit almost everyone.

Rather than hoping your federal government creates change, take your retirement into your own hands. Increase your savings, contribute as much as you can to your retirement accounts, and pay attention to fees charged by your advisor and the funds you invest in.

Conclusion

Social Security is critical to many American lives. It provides benefits in retirement and it also provides disability benefits for those who are eligible. However, the current system is hurting. There is way more being paid out in benefits than is coming in. If something isn’t done by the government, benefits will probably decrease.

We are effectively left with two options. One, the government as to create legislation to fix the problem. Two, we take our whole retirement into our own hands and save more for the future.

Facts and Figures can be found on Social Security or this Business Insider article.

Share |