For most seniors, Social Security plays a pivotal role in their retirement financial planning. A staggering one-third of individuals aged 65 and older depend on Social Security for over half of their retirement funds. Without these monthly benefits, life for many would lose a significant degree of comfort.
Though the abrupt disappearance of Social Security is not anticipated in the near term, a severe funding crisis lies on the horizon. If the government fails to step in, here’s the unsettling road we may be forced to travel down.
Image source: Getty Images.
The Forecast for Social Security in 2034
According to the most recent Social Security Trustees Report, the combined Social Security trust funds are projected to run dry in 2034. These trust funds serve as vital sources of funding for the program, alongside Social Security payroll taxes and benefit taxes paid by an increasing number of retirees.
There are two trust funds at play: the Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund. As indicated by their names, the OASI fund provides benefits to retired and deceased workers and their eligible family members, while the DI fund offers support for disabled workers and their families.
The DI trust fund is not expected to be exhausted within the 75-year period covered in the report (2023 to 2097). However, the OASI trust fund is forecasted to be depleted by 2033. This depletion would result in benefit reductions. While Congress has previously allowed fund transfers between OASI and DI, this would only offer a one-year reprieve to Social Security beneficiaries.
Commencing in 2034, the Social Security Administration would need to slash benefits by 20% across the board. Moreover, checks would shrink by an additional 6% between 2034 and 2097. This grim scenario would place a significant burden on the finances of the countless seniors reliant on these benefits to cover their basic living expenses.
A Glimmer of Hope: Potential Solutions
Thankfully, the dire situation outlined above is not set in stone. The government is cognizant of the funding crisis facing Social Security, and numerous lawmakers have tabled solutions to address the issue. While no decisions have been finalized, proposed remedies include:
- Raising the Social Security payroll tax rate (currently 12.4%, split evenly between employees and employers)
- Increasing the income threshold subject to Social Security payroll tax (set at $168,600 in 2024) or removing the ceiling altogether
- Raising the full retirement age (FRA), the point at which workers can receive their full benefits based on their work history
- Trimming cost-of-living adjustments (COLAs) that help Social Security keep pace with inflation
One possible reason for the lack of a clear-cut solution is that many proposed measures could inadvertently hurt workers, seniors, or both. Heightened Social Security taxes may impede retirement savings for workers, while reducing COLAs or raising the FRA would lead to reduced benefits for retirees.
Other suggestions involve paring Social Security benefits for higher earners while leaving lower earners’ benefits unaffected. However, no single solution has emerged as the silver bullet. It is likely that any government action will necessitate a multifaceted approach, but only time will provide the definitive answer.
Taking Action: What Can You Do?
If you have ideas on how the government can address this funding crisis, reach out to your Congressional representatives and voice your opinions. Beyond that, it’s a waiting game to see the path the government opts for.
If you wish to be more proactive, focus on elements of retirement planning within your control. Strive to save as much of your earnings for retirement as possible. For those eligible for a 401(k) match, allocate your funds there initially. If a workplace plan is not available, consider an IRA or a health savings account (HSA) to safeguard your funds.
Delaying your Social Security benefits could also optimize your returns under the program. While eligibility begins at 62, waiting to apply increases your benefits slightly each month until you hit the maximum benefit at 70. This principle is unlikely to alter even if Social Security undergoes modifications. Admittedly, delaying enrollment requires covering expenses independently until then. However, personal savings can provide a safety net, or you might contemplate deferring retirement until you’re ready to claim benefits.
In the coming years, clarity will hopefully emerge regarding the future of Social Security. When the government announces changes, take the time to tweak your retirement strategy to ensure maximum preparedness.
The $22,924 Social Security bonus most retirees completely overlook
If, like many Americans, you are lagging behind on retirement savings, several lesser-known “Social Security secrets” could potentially enhance your post-retirement income. For instance, a simple trick might boost your annual income by as much as $22,924. Learning how to maximize your Social Security benefits could pave the way for a more secure retirement. Click here to explore these strategies further.
View the “Social Security secrets”
The Motley Fool has a disclosure policy.
The viewpoints expressed here belong to the author and do not necessarily align with those of Nasdaq, Inc.