Retirement / Social Security
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If you’re a millennial or a GenXer who’s just started saving for retirement, you might want to step up your efforts now. A recent report found that Social Security benefits could be cut as early as 2034 due to an onset of funding shortages.
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The 2021 report from the Social Security Trustees found that starting in 2034, retirees will only receive 78% of the full benefits they expected if Congress doesn’t find a way to address funding issues.
But what is the problem with the Social Security program that needs to be fixed? And how can Congress take action to fix it?
How Social Security Works
To understand how and why Social Security is broken – or, at least, cracks under pressure – it’s important to understand how the program works. Employers and employees share a payroll tax of 12.4% on the employee’s first $147,000 of income. The self-employed pay the full 12.4%.
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For every dollar donated to Social Security, 85 cents goes into a trust fund that pays monthly benefits to current retirees and their families, while the other 15 cents goes to a separate trust that pays benefits to the disabled and their families, according to CNBC.
“You want the worker to beneficiary ratio to be at a healthy level where you don’t have too little [working] people are paying for too many beneficiaries,” Kathleen Romig, senior policy analyst at the Center on Budget and Policy Priorities, told CNBC.
However, due to a drop in the birth rate following the baby boom, there are fewer people contributing to the program. At the same time, longer average lifespans and increasing numbers of baby boomers retiring have created more beneficiaries. By 2034, according to reports, the Social Security Administration will have exhausted excess reserves, which means reduced benefits for retirees at that time.
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Social Security is a bipartisan program supported by 90% of all Democrats, Republicans and independents based on a recent AARP survey, CNBC reported. It is a crucial program to support older Americans in their retirement. And although it was designed to supplement other retirement income, the Center on Budget and Policy Priorities reports that half of seniors get 50% or more of their retirement income from the program.
Steps Congress Can Take
Congress has a few options to fix the problem before 2034. It can cut benefits, raise the retirement age, or raise Social Security taxes. It’s an age-old budgeting problem. To eliminate a deficit, you must find ways to spend less or earn more.
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Congress was able to avoid this exact problem in 1983 by raising the full retirement age from 65 to 67 and, simultaneously, taxing Social Security benefits as income.
Social Security Bill 2100, introduced by Democrats in the House of Representatives, could have a similar result. The plan suggests applying payroll taxes to people earning more than $400,000, adjusting the price index for the cost of living and increasing benefits for low-income workers. Taxing high-income Americans would balance out increasing benefits for low-income retirees.
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The legislation would require bipartisan support and, experts say, a sense of urgency. However, “there is no incentive from members of Congress to address this issue before it is imminent,” Alicia H. Munnell, director of Boston College’s Center of Retirement Research, told CNBC.
What you can do to prepare
Congress stepped in just in time in 1983 to solve the Social Security problem. But today’s American taxpayers may no longer want to take that chance. Set a goal to set aside retirement income through investments based on your age and risk tolerance. Studies from Chase Bank and other financial experts recommend that you plan to replace 80-90% of your working income in retirement, although this amount may be lower if you retire debt-free and mortgage-free. On average, 40% of retirement income comes from Social Security benefits, according to the Social Security Administration, but you might want to plan for the worst case and look to set aside more money.
Speak to a financial advisor to help you assess your budget and determine the best course of action to jump-start your retirement savings. You will have peace of mind knowing that your future will not be determined by government action or inaction. And if Congress solves the Social Security riddle before 2034, you could have extra savings to live out your final years.
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