If you’re concerned about the sustainability of Social Security, you’re not alone.
Those who are far from retirement may wonder if Social Security benefits will be there for them at all.
And, many people who are close to retirement or already retired are concerned about their benefits being cut when they need them most. But the reality may be less drastic than either of these scenarios.
First, a little background. Social Security is made up of two main elements: the Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund.
The first fund provides benefits to retired workers and their families, as well as to survivors of deceased workers. The Disability Insurance is for workers with certain long-term medical conditions or disabilities and their families.
With that in mind, let’s dive into some frequently asked questions about Social Security and what’s at stake for the program in the future:
How healthy are the trust funds and how long will they last?
According to the 2014 Social Security Trustees Report, the Old-Age an Survivors Trust Fund is expected to have enough reserves to pay full benefits until 2034 and it is estimated that the Disability Insurance Trust Fund should be able to pay in full until 2016.
Currently, the combined trust fund reserves are increasing and should continue to do so for another five years. That will change in 2020, when annual costs will exceed total income and the U.S. Treasury will need to dip into trust fund asset reserves. Without action from Congress, the combined trust fund reserves will likely be depleted by 2033.
What happens after the funds are depleted?
Once the combined trust fund reserves are depleted, the revenue collected from payroll taxes is expected to cover about 77 percent of scheduled benefits. That means that if there are no changes to the program in the next 20 years, the benefits could be about 23 percent less than expected.
What kind of reform or legislative action might take place in the future?
Here are a few of the long-term reform proposals on the table that look to either increase tax revenue or change eligibility/benefit amounts:
- Raise the full retirement age. Currently, full retirement age for those born in 1960 or later is 67. One proposed reform is to gradually increase the full retirement age to 68 or 70.
- Reduce benefits for higher earners. Another option is to gradually decrease benefits for the highest-earning 25 or 50 percent.
- Raise or eliminate the payroll tax cap. Currently any wages above $117,000 aren’t subject to the tax. Removing this tax cap has also been proposed to increase tax revenue.
- Raise the current Social Security payroll tax rate. Some reformers prefer raising the payroll tax rate to increase tax revenue. According to this year’s report, an immediate and permanent payroll tax increase of 2.83 percentage points would be necessary to address the revenue shortfall.
How do I find out what I’m entitled to under the current law?
The easiest way to get personal benefit estimates is to use the Social Security website, www.socialsecurity.gov. You can either review your Social Security statement or use the retirement estimator.
In the meantime, your best approach is to save as much as possible now so that your retirement is funded by multiple sources and does not rely solely on Social Security benefits. It’s important to develop a plan before retirement to understand where your retirement income will come from.
Erin Eddins is a certified financial planner professional and chartered financial consultant with an emphasis on investment and retirement planning services.
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