Social Security’s long-term viability remains in doubt, prompting individuals to raise issues such as “Will Social Security run out?”
According to the Council of the Federal Old-Age, Social Security’s revenue is predicted to surpass its costs in 2019 in their 2020 annual reports.
According to the analysis, reserves will be completely drained by 2035, and yearly taxes would only pay around three-quarters of the benefits each year after that.
Discover what more is in store for Social Security shortly, as well as what the program will look like in 2035. You may want to start learning how to make your money go further right now.
The Reasons for Social Security’s Financial Difficulty
Another contributing factor is longer life expectancies, a smaller working-age population, and a rise in the number of people who are now in retirement. More than 78 million Americans will be over 65 by 2035, increasing from over 56 million now.
Therefore, more individuals will withdraw money from the Social Security system while fewer people will contribute.
However, this does not rule out the possibility of the program running out of funds. Payroll taxes are estimated to fund around 76 percent of the slated benefits.
However, if the 21 percent budget shortfall is not closed, pensioners might have their Social Security benefits reduced, and employees could be required to contribute more to the system.
According to analysts, if nothing is done to address the current situation, Social Security may resemble this in the future.
Benefits may be reduced in the worst-case scenario.
You should be aware that if you intend to depend on the program after 2035, there is a possibility that you may get fewer Social Security payments than you would have anticipated.
It is estimated that benefits would have to be decreased by 23 percent if no adjustments are taken to address the trust fund deficit, according to the trust funds’ 2020 annual report from the board of trustees.
Many elderly individuals would take a significant financial blow due to this payment reduction. According to the Social Security Administration, it is estimated that social security provides at least half of the income for 50 percent of old married couples and 70 percent of elderly single persons.
Benefits may be reduced.
Some analysts are skeptical that a significant reduction in Social Security payments is on the horizon. Retirement Capital Planners Joseph E. Roseman, Jr., a Social Security specialist and retirement planner warned that the repercussions of such an occurrence would be “beyond painful” for everyone in the nation. “You’ve got a national tragedy on your hands,” says the narrator.
He believes that Congress will intervene before 2035 to avoid such a drastic reduction in benefits. Mary Beth Franklin, a Social Security specialist and contributing editor for Investment News, feels that a significant reduction in payments is unlikely shortly.
“As pensions are being phased out, individuals are becoming more reliant on Social Security,” she said. Because of the program’s widespread popularity, lawmakers are unlikely to want to make changes to benefits for current retirees, and they will be forced to find other solutions to the trust fund’s deficit.
Alternatives for Balancing the Social Security Budget
Although Social Security is not scheduled to run out of money for another 15 years, several reform proposals have already been advanced to cope with the projected budget gap. These are some of the alternatives:
- Raising the rate of the payroll tax
- Increasing the number of earnings that are subject to Social Security taxation
- Raising the full retirement age from 65 to 70 years old
- Bringing the yearly cost-of-living increases closer to zero
- Benefits are being reduced.
Continue reading to discover more about the specifics of each of those plans, as well as how they might affect Social Security if they were to become law.
The Social Security payroll tax rate may increase in the future.
If benefits are not reduced, taxable income for the program will probably have to be increased.
One method of doing this is to raise the payroll tax rate. A 6.2 percent payroll tax paid by employees and an additional 6.2 percent paid by employers provides the funding for Social Security (self-employed people have to pay the full 12.4 percent ).
What Would Be the Consequences?
According to the 2020 annual report from the trustees, if the trust fund reserves are gone, the payroll tax would need to be increased by 3.14 percentage points to generate enough money to continue the program. If nothing is done to address the situation, it will take a 4.13 percent growth until 2035.
On the other hand, Roseman does not anticipate Congress to raise the payroll tax to increase trust fund reserves. “It’s probably the thing that people have the least interest in out of anything you can think of,” he remarked. “It’s a tax rise,” says the author.
In the event of this change, what would Social Security look like in 2035?
A rise in the payroll tax rate might take on a variety of shapes and sizes. The employer’s responsibility is to distribute the whole payroll tax evenly between the employees’ and employers’ contributions.
The expected tax increase of 3.14 percent might be distributed evenly between employers and workers, or it could be distributed more heavily to employers to conceal the tax rise from taxpayers.
Rep. John Larson (D-Conn.) has introduced a bill dubbed the Social Security 2100 Act, advocating for an equal division of benefits. Due to this legislation, employers and workers would pay a higher Social Security tax rate of 7.4 percent.
According to Politico, the measure has received some support but has been unable to go forward in Congress.
More Wages Could Be Subject to Taxation
It is also possible to expand the number of incomes subject to taxes to generate more money to pay Social Security. Social Security taxes are levied only on the portion of salaries that exceeds the contribution and benefit basis for Social Security benefits.
What Would Be the Consequences?
Franklin said that to ensure the long-term viability of the trust fund, the taxable salary ceiling would have to be increased even more or eliminated so that all income would be subject to the payroll tax.
This move would impact high-income individuals whose incomes over $137,700 are now exempt from Social Security taxes.
In the event of this change, what would Social Security look like in 2035?
Only those whose earnings are more than the present contribution and benefit base would be affected by a hike in the taxable salary limit.
For example, if you earn $80,000 per year, you must pay Social Security taxes on all of your earnings, regardless of whether the limit is raised to $130,000, $300,000, or eliminated. As a result, whether the limit is raised to $130,000, $300,000, or removed entirely does not affect your payroll taxes.
However, if you earn $250,000 as a W-2 employee in 2020, you will only be required to pay Social Security taxes on the first $137,700 of your earnings, for a total of $8,537.40 in Social Security taxes. If the cap were raised to $300,000, you would be required to pay Social Security taxes on all of your $250,000 income, for a total of $15,500 in Social Security contributions.
The full retirement age may rise in the future.
Because tax increases are unpopular, Roseman believes that Congress will be more inclined to raise the full retirement age for Social Security payments in the future. As a result, younger generations will have to work for a longer period before becoming eligible for benefits.
As of today’s date, the age at which you may claim full retirement benefits varies between 65 and 67 if you were born in 1937 or earlier and 65 and 67 if your birthday falls between 1961 and today’s date.
Must check: New York quickly became the number one market for legal sports gambling in the U.S.
What Would Be the Consequences?
According to Roseman and Franklin, the plans to progressively increase the full retirement age to 69 would help maintain more money in trust funds.
At the same time, it can remove a popular approach used by seniors to maximize their Social Security benefits. Currently, if you postpone receiving your benefits over the full retirement age, your payout rises by one percent for each year you delay until you reach 70, according to Roseman.
In the event of this change, what would Social Security look like in 2035?
Increases in life expectancy may lead some to believe that increasing the retirement age is a sensible reaction since individuals would have more time to work.
On the other hand, raising the retirement age reduces benefits since it delays the receipt of benefits that individuals anticipate.
The overall advances in lifespan have also failed to benefit many low-income employees, who have lower life expectancies than those from higher socioeconomic classes. The elderly and those on low incomes would be the most adversely affected by an increase in the retirement age.
The Social Security COLA may be reduced.
In most cases, retirees who receive Social Security payments will see a little rise in their checks to keep up with the inflation rate. The consumer price index is used to calculate these cost-of-living adjustments, sometimes known as COLAs.
Following a year in which there was no cost-of-living adjustment, the previous several years have seen a 0.3 percent rise in 2016, a 2 percent increase in 2017, a 2.8 percent increase in 2018, another 2.8 percent increase in 2019, and a 1.6 percent increase in 2020, respectively.
What Would Be the Consequences?
Roseman suggested modifications to cost-of-living adjustments may be made to sustain the Social Security trust funds.
Most likely, the formula would remain the same for those born before 1960. People born after 1960, on the other hand, may see their COLA decrease, according to him.
Consequently, benefit payments will not keep pace with inflation if this occurs. People who depend largely on Social Security may have to find methods to cut down on their expenditures to make ends meet in the future.
In the event of this change, what would Social Security look like in 2035?
During the last several years, it has been shown that inflation adjustments to Social Security income may be minimal or non-existent.
The low cost-of-living adjustments might make it very difficult for persons living on fixed incomes to meet their financial obligations in areas where housing and rent prices rise every year.
Additionally, seniors spend more on healthcare expenditures than younger individuals, which tend to grow higher than inflation.
Benefits may be reduced in the future.
Suppose the Social Security funding shortfall is not resolved by cutting benefits by 19 percent for all Social Security beneficiaries, including those currently receiving benefits, or by cutting benefits by 23 percent for future Social Security beneficiaries.
In that case, the board of trustees’ 2020 annual report suggests that the shortfall can be resolved by cutting benefits by 23 percent for future Social Security beneficiaries.
But if nothing is done between now and 2035, all benefits will be cut by a quarter.
What Would Be the Consequences?
Benefit reductions might take a variety of shapes if the Social Security trust fund runs out of money in 2035. The clearest cut would be one that is equal across the board.
Another alternative would be to decrease benefits in various ways depending on the individual’s income. For example, payments for the top 25 percent or top 50 percent of earnings may be lowered, and benefits for lower-income Social Security claimants may be preserved.
In a similar vein, Social Security may be converted into a means-tested payment, with the amount of the benefit decided in part by the recipient’s income or assets. If you pay into the Social Security system, you will get benefits regardless of your income or assets at this time.
What Would Social Security Look Like in 2035?
According to projections, the average monthly retirement payout will be $1,503 in 2020. If benefits were lowered by 20 percent across the board, the average benefit would be reduced by about $301 per month, or $3,612 per year, on a monthly average basis.
For example, if benefits were to be reduced by 23 percent, the monthly reduction would be $346, or $4,152 annually.
Is This a Problem That Is Simple To Solve?
According to Roseman, the Social Security deficit issue is straightforward to resolve, but convincing Congress to enact the required reforms is more difficult. “Nobody wants to make a concession,” he said.
On the other hand, Roseman does not believe that Social Security will run out of money. He reminds his customers that they may rely on it as a source of retirement income but that it should not be their sole or primary source of income in retirement. “I would never encourage somebody to rely only on Social Security,” he declared emphatically.
