It might not happen, but you need to be ready if it does.
There are many sad facts of life. For example, every day we get older, whether we want to or not. Some stocks we invest in will end up disappointing us greatly. Some products we love — such as soups or socks — will be discontinued one day.
There’s a sad fact of life related to Social Security, too: If the program isn’t shored up, future benefits will be smaller. It’s scary, but remember that it might not happen. Still, it’s good to understand what’s going on and what might result.
Social Security’s predicament
Let’s start with a little history. Social Security’s design has people who are currently working paying taxes into coffers that pay retired beneficiaries. As long as there are workers, there will be money for beneficiaries — but the ratio of workers to retirees has been changing over time.
Here’s a look at how the ratio of covered workers to beneficiaries has changed so far:
| YEAR | RATIO OF COVERED WORKERS TO BENEFICIARIES |
|---|---|
| 1945 | 41.9 |
| 1955 | 8.6 |
| 1975 | 3.2 |
| 1985 | 3.3 |
| 1995 | 3.3 |
| 2005 | 3.3 |
| 2015 | 2.8 |
| 2020 | 2.7 |
| 2021 | 2.7 |
Various government estimates put the ratio in 2040 at between 2.1 and 2.4. What’s going on? Well, people have been living longer in recent decades, and many have been retiring earlier. Those factors have caused less money to be flowing into the coffers while more money flows out.
This doesn’t mean, as many people assume, that benefits will cease to exist in the near future. Instead, it means that benefits will shrink — if nothing is done. (There’s a decent chance that our representatives in Washington will take action, because social Security is vital to their constituents.)
How will your Social Security benefits be affected?
The Social Security Board of Trustees issues an annual report on the state of Social Security, and its latest one notes that the Old-Age and Survivors Insurance Trust Fund is now “projected to become depleted in 2033, a year earlier than in last year’s estimate…”
Remember that at that time, Social Security will still be collecting taxes from workers’ paychecks — those total taxes just won’t be enough for the program to fully fulfill its obligations. It’s estimated that beneficiaries will then collect about 77% of what they’re due. So they’ll have to deal with a 23% cut in their benefits.
The folks at the Committee for a Responsible Federal Budget have estimated just how these cuts will affect beneficiaries. Here are some of their findings:
- In [2033], annual benefits would be cut by $17,400 for a typical newly retired dual-income couple.
- For a typical dual-income couple retiring in 2033, we estimate this would represent an immediate $17,400 cut in current dollar annual benefits and an immediate $13,100 cut for a typical single-income couple.
- The cuts would differ for couples at different income levels. A low-income, dual-income couple retiring in 2033 would see a $10,600 cut while a high-income, dual-income couple retiring in 2033 would see their annual benefits slashed by $23,000.
- Adjusted for inflation, we estimate a typical dual-income couple would face a $14,000 cut, while low-income couples would face [an] $8,500 cut and high-income couples would face a $18,500 cut.
They also added an editorial note: “Any 2024 presidential candidate who pledges not to touch Social Security is implicitly endorsing a 23% across-the-board benefit cut for the 70 million retirees when the Social Security retirement trust fund reaches insolvency in just a decade.”
Fixing Social Security
Fortunately, there are lots of actions that Congress could take to shore up the program. For example, workers might start getting taxed on all their earnings. Right now, only earnings up to $160,200 are taxed, so someone earning $160,200 and someone earning, say, $10,160,200 pay the same in Social Security taxes. Clearly, if all earning were taxed, more money would flow into the coffers. (That earnings cap is adjusted every year; last year it was $147,000.)
The tax rate we pay for Social Security might also be increased to a modest degree, bringing in a lot more money. Congress might enact several fixes and could potentially make Social Security even stronger, increasing benefits for retirees. That would be a terrific move, since many millions have not planned for retirement and have not saved enough, either.
What should you do?
So what should you do? Well, for best results, hope for the best but prepare for the worst. If you’re not saving and investing for retirement in earnest, start doing so now. (Simply investing in an index fund can be all you need to do.)
Aim to make up that 23% shortfall by building other income streams — via stock dividends, annuity income, rental property income, selling stocks over time, or any other means available to you. Explore all possibilities, such as reverse mortgages, too.
The more prepared you are, the more comfortable a retirement you’ll likely have.