When the Social Security Act was signed into law by President Franklin D. Roosevelt in August of 1935, the intention was to provide an economic safety net for aging Americans. Over the years, as the original law was expanded upon, Social Security became a truly viable source of substantial retirement income for many citizens. After decades of sustaining its mandate, the program’s viability is now being called into question. As of today, the Social Security Board of Trustees projects that program costs will rise to the point that taxes will only be enough to pay 75% of scheduled benefits in 2035. The root cause behind the solvency issue is a drop in birth rates, which has led to an aging population. Therefore, with less Americans paying in, while more Americans begin to draw, something’s got to give.
The apprehension building around the fate of Social Security is most certainly warranted. However, as we continue to draw closer to 2034, you can bet that the issue will become a larger focal point within Washington. In fact, we’re already beginning to hear talking points emerge on the campaign trail, and among the major political parties. Keep an eye out for Social Security to move closer to center stage in the 2024 presidential election.
Fixing Social Security
The financial planning community closely follows any and all headlines pertaining to Social Security changes. Social Security income still tends to be a crucial piece for most retirement income plans, so even the slightest of changes has the potential to significantly influence a retirement experience. The good news for retirees who are close to, or already receiving their benefits, is that based on the early chatter of proposed regulation, current beneficiaries are likely to be the least impacted. So far, it appears that the emerging view within Washington is that pulling the rug out from under current or near beneficiaries would be catastrophic. Which then raises the question, ‘What other changes can be made to fix the problem?’
It seems that the most likely path that congress will explore is pulling different levers pertaining to the younger generations. In order to push out the solvency of Social Security to later years more money has to flow into the Social Security trust, and remain there for a longer period of time. That likely translates to an increase in the combined 15.3% FICA tax that employees and employers pay through their paychecks. It could also mean a potential increase in the ages you can apply for Social Security. Or finally, a reduction in the younger generations’ benefits by changing the benefits calculation. Pulling one or a combination of these levers would result in expanding the solvency of Social Security by years, potentially decades, depending on the gravity of changes.
Overcoming Social Security Nerves
For individuals on the cusp of benefits, or currently receiving benefits, the chances that your retirement plan will be blown up by abrupt and sweeping program changes appears to be highly unlikely. If current Social Security beneficiaries are going to be impacted by program revisions the changes are likely to be announced well in advance, and relatively minor compared to what younger workers will experience. It doesn’t mean that you’re completely in the clear, but congress is likely to look at current benefit reductions as a last resort. In the meantime, it’s worth having a conversation with your financial planner to discuss the impact a potential benefit reduction would have on your plan. Assuming that regulation changes are known well in advance, there are likely planning tools and strategies that can work to offset a reduction to your benefits.
For my fellow Millennials and younger generations, I would encourage you to begin discounting the role that Social Security benefits will play in your retirement plan. The fact is that there are simply too many unknowns swirling around the Social Security conversation to reasonably consider it a cornerstone contributor to your retirement income. As a younger worker, take the pragmatic approach. There’s no reason to tempt fate by assuming you can count on substantial Social Security income in retirement. By operating under the assumption that Social Security will play a negligible role in your retirement income you are in essence taking more control of your retirement destiny. Saving more today will reduce your reliance on Social Security, afterwhich, any benefit that you do end up receiving will only add to your already sustainable retirement lifestyle.
