When 2033 comes around, the Social Security Trust Fund will start paying out three-quarters of scheduled benefits to recipients. By paying out three-quarters, the program is projected to continue until 2086. What this means is that recipients will not receive 100% of the benefits that they have paid into. For some individuals, this is frightening because life after retirement can still be tight financially. Plus, no one knows how long they are going to live, which means having to make sure IRAs, 401(k)s and savings accounts that are typically secondary to Social Security are able to last as long as possible.
Some individuals have suggested opting out of Social Security benefits if IRA and 401(k) distributions weren’t taxed. As to what measurable impact this would have on the Social Security Trust fund, it is not known. It is believed most individuals would not forego the benefits, especially after paying into them up until this point. Nonetheless, this suggestion highlights the fact that there are individuals perfectly aware of the issues surrounding retirement and Social Security.
The Problem with Social Security
One of the major issues with Social Security is that there are more people collecting now than before. In addition, people are living longer and that means they are receiving payments longer from a system based on old demographics. When the system was implemented in 1940, life expectancy was not what it is today and health care costs were much lower. Social Security has not been adjusted to reflect these changes. In 1940, the average person lived to be 65 and there were only 9 million individuals 65 and older. In 2010, that number totaled 40 million.
Yes, paying out three-quarters of the benefits will absorb some of the impact that the aging population will have on Social Security, but the program is still slated to run out of money in 2086. If individuals keep living longer, then the fund could be scheduled to run out before 2086. This is especially true since birth rates are up and mortality rates are reducing. If the retirement age would be around 70 years of age in 2086, then those born after 2016 will have no Social Security to rely on. If the retirement age increases to 73, those born in 2013 will see its demise.
Many suggestions have been made to lawmakers by citizens regarding what should be done about the future of Social Security. One suggestion is to disconnect Medicare and Social Security. There are some individuals who need Medicare only, which is who such a move would benefit.
Another suggestion is the implementation of a means test that would quantify the amount of benefits a person would receive. This could determine who would need their Social Security upon retirement and how much of it they would need. In other words, Social Security would be more like insurance. A person could use it as they needed it rather than automatically receiving the payments when they may be receiving a reasonable income from another source. This could relieve the fear that some individuals have about their retirement accounts being completely used up. They can supplement those accounts with Social Security and increase the amount as the balances in retirement accounts decrease. However, this would require regular assessments of one’s income and their sources of income to determine how much of their Social Security they could receive.
A third suggestion is to line up Medicare and Social Security eligibility to encourage individuals to work longer in order to increase their benefits. Unfortunately, not everyone is willing or able to work past the regular retirement age. Some individuals retire early because they are unable to work until retirement age or they find that their income would not change whether they worked or not.
Securing Your Retirement
Right now, it is ideal to save in every way you possibly can for your retirement. Many times, Social Security has been predicted to end in a specific year for us to then find that it will end sooner than projected. Now that an adjustment has been made, it is anticipated that benefits will be available for much of the current working class retiring after 2033, but not all of the scheduled benefits will be received.
So make sure you have enough money by contributing as much as you can to IRAs and 401(k)s. This will also increase any matching contributions by employers since they typically match up to 50% of your contribution. You also want to place money into a high interest bearing account so that the money will grow reasonably over time. Do this with the mindset that living off of Social Security is not an option for you. Depending upon how old you are and when you will retire, it is possible that Social Security will not be there for you to rely on. If it is, then that can be an added bonus.
You should also expect the retirement age to increase as you age. It is not impossible for the retirement age to be in the 70s as individuals continue to live longer. Unfortunately, not everyone can work until they are in their 70s, so that is something else to consider when saving for retirement. If you have to retire early, you may not be able to take advantage of your entire Social Security payment. Instead, you may receive a reduced payment until you are of retirement age.
The last thing you can do is talk to your lawmakers. If you have an idea, go ahead and tell them. You never know when Social Security will be on the table for discussion. The door to talks about the Social Security issue is typically opened every few years when new statistics are released regarding the number of seniors drawing Social Security. These statistics typically state that the fund is going to run out sooner than the last projection. Sometimes, the numbers lead to a retirement age increase. So as legislators are mulling over changes, you can make an impact through letters, emails, or simple telephone calls to your local congressman.