The State of Social Security: How to Plan and What to Know
April 14, 2023
If you follow financial news, you’ve likely seen some alarming reports regarding the state of social security in the coming years. The most alarming headlines proclaim that social security could run out by 2035. This is a bold claim and one that could be easily misunderstood. Taken out of context, this news might have you scrambling to take out your funds post-haste. Fortunately, things aren’t quite as dire as they seem, and withdrawing social security early isn’t the best option for most.
The History of Social Security
Social security comes from trust funds known as the OASI (old-age and survivors insurance trust fund) Trust Fund and DI (disability insurance) Trust Fund. These funds are often referred to together as OASDI. Workers pay into these funds through their payroll taxes.
Historically, this system worked because there were more workers than retirees. In 1940, there were over 159 covered workers per beneficiary. By 1945, this number fell to a ratio of 41.9:1, and in 1950 it was 16.5:1. This trend continued dramatically through 1970 when there were just 3.7 workers for every social security beneficiary.
From 1970 to 2010, the number hovered between three and four workers for each beneficiary, eventually falling just below three. Though this is a marked difference from the glory days of social security in the early 1940s, it’s worth noting that this trend is hardly new. Just as we’ve successfully addressed social security in the past, so too can we overcome the associated challenges today.
The Current State of Social Security
As of 2022, there were 2.8 covered workers per OASDI beneficiary. Last year, the social security balance decreased by $22 billion because the incoming payroll taxes aren’t enough to offset the benefits owed. If this trend continues, the social security fund could run out by 2035. As of 2021, over 179 million people relied on social security benefits, which makes this a very alarming trend.
It’s important to understand, however, that even if the social security fund was depleted, incoming payroll taxes should be sufficient to cover around 80% of benefits. Individuals wouldn’t find themselves with no income — they would simply face a reduced income.
Solutions to the Social Security Crisis
Policymakers are keenly aware of the issues facing social security. In fact, a similar situation occurred in 1983. Lawmakers successfully delayed the depletion of the social security fund by increasing payroll taxes and the age at which benefits began. Similar options are being examined once again. Some of the potential solutions include:
- Increasing the social security payroll tax which is currently capped at 6.2% up to $160,000 to include taxation on income up to $400,000
- Increasing payroll taxes from 6.2% to 6.5%
- Implementing means testing to determine whether every individual qualifies for social security benefits
- Pushing back the retirement age
These measures would delay the depletion of social security funds even if the ratio of active workers to retirees remain unchanged. Baby Boomers are currently driving the social security issue as they enter retirement en masse, while Millennials are overtaking Boomers as America’s largest living adult generation. The shape of the country may continually change as different generations enter retirement and those behind them enter the workforce.
What You Should Do
If you’re currently near retirement, it’s unlikely that you’ll see a major change in your social security benefits. The potential issues that are facing OASDI funds are more likely to impact individuals who are about ten years away from retirement. It’s important to understand the lengthy nature of this timeline to avoid making rash decisions now on the basis of projections that are more than a decade out.
Every year that you delay your social security benefits between the ages of 67 and 70, these benefits increase by a guaranteed 8%. You don’t have to wait a full year to get this perk, either. The increase is handily prorated to 2/3 of 1% for each month that you hold off on claiming them. Conversely, if you choose to withdraw your social security funds early, your benefits will decrease by 30%.
You should only consider withdrawing funds early if you’re facing medical difficulties, are concerned about reaching retirement age, or if you’re facing severe financial challenges. Even in these instances, you may find that there’s a better way to get the funds you need without dipping into your social security benefits before you’ve reached full retirement age. The fear of social security running out shouldn’t be a driving factor in your financial decisions.
Though there is no one-size-fits-all answer for how to best manage your retirement funds, you will find that you can plan ahead with minimal concerns about the state of social security. With more than a decade until social security could potentially be reduced, there’s ample time to make appropriate arrangements with an eye to the continually developing nature of the situation.
If you have other concerns about retirement planning or social security, we’re happy to discuss them with you. You can schedule a meeting with us to start your road to success.