As politicians debate the future of Social Security, comprehensive financial planning will become increasingly important for those seeking a secure retirement.
Social Security has long been a dependable source of retirement income for millions of Americans. Yet shifting demographics, economic challenges, and the aftershocks of the COVID-19 pandemic have raised concerns about the sustainability of the program.
In fact, the latest projections show that Social Security Trust Fund reserves are likely to run out by 2033—one year sooner than previously estimated. Unless Congress takes steps to shore up the program, beneficiaries will likely see a reduction in benefits.
In this blog post, we’ll explore the factors contributing to a potential Social Security shortfall, as well as the financial planning strategies you can leverage to help secure your retirement.
How Social Security Works
In the United States, Social Security is a federal government program that provides retirement, disability, and survivor benefits to eligible individuals.
Employers and employees pay into the system through payroll taxes. Currently, employees contribute 6.2% of their income, and employers pay an additional 6.2% for each employee.
Meanwhile, self-employed individuals pay the entire 12.4% payroll tax. In 2023, payroll taxes apply to up to $160,200 of a taxpayer’s annual income.
Contributions go into a Social Security Trust Fund, which is used to pay benefits to current recipients. Consequently, when it comes to the future of Social Security, there’s no guarantee that the money you contribute will be available when you retire.
Why the Future of Social Security Is in Jeopardy
Although the Social Security Trust Fund had an annual surplus of $10.9 billion in 2020, it ran a deficit of $56.3 billion and $22.1 billion in 2021 and 2022, respectively. The future of Social Security is now uncertain, largely due to a combination of demographic changes and economic factors.
First, the birthrate has fallen in recent decades amid a wave of retirements among Baby Boomers, the largest generation of workers in American history. That means there are more beneficiaries but fewer workers paying into the system to fund Social Security benefits.
To put this in perspective, there were 5.1 workers per Social Security beneficiary in 1960. Today, that ratio has fallen to 2.8 workers per beneficiary, and estimates suggest it will decline to 2.1 workers per beneficiary by 2040.
Meanwhile, the average life expectancy for Americans has increased over time.
When Social Security began in 1935, workers who started collecting benefits at age 65 were only expected to live another 12.5 years. By 2030, these projections rise to 21.6 years for women and 19.2 years for men.
Thus, not only are there more beneficiaries than workers today, but beneficiaries are collecting benefits for a longer period, on average.
More recently, the Covid-19 pandemic helped put the future of Social Security in jeopardy by prompting millions of workers to quit their jobs or forcing them into early retirement, resulting in a sharp decline in payroll taxes. An economic slowdown, persistent inflation, and weaker productivity growth have only exacerbated the issue.
How the Future of Social Security Affects Retirees
Unless Congress takes steps to shore up the program, beneficiaries will soon see their benefits decrease.
Current projections indicate that the Old-Age and Survivors Insurance (OASI) fund will be able to cover scheduled benefits in full until 2033. At that point, the program will only be able to fund 77% of scheduled benefits.
Social Security beneficiaries may also see reduced cost-of-living adjustments (COLAs), which help maintain the purchasing power of Social Security benefits against inflation. For example, the cost of Social Security increased by 8.7% this year to account for rising inflation, according to the Wall Street Journal.
Lastly, various members of Congress have proposed raising Social Security’s full retirement age, changing the way benefits are calculated, and raising taxes to help cover the shortfall. No matter what Congress decides, the future of Social Security is likely to look markedly different than it does today.
Preparing for a Potential Social Security Shortfall
Ultimately, the future of Social Security depends on Congress’s ability to agree on a course of action. Given the potential political implications, it seems unlikely that either party would let the fund dry up altogether.
Still, waiting on Congress to shore up Social Security may not be wise, especially if you’re nearing retirement age. Instead, you may want to consider the following financial planning strategies, which can help you offset the risk of a potential reduction in benefits.
First, be sure to diversify your sources of retirement income. If you can, aim to max out your contributions to your employer-sponsored retirement plan and/or individual retirement account (IRA).
In 2023, individuals can contribute up to $22,500 to a 401(k), 403(b), and most 457 plans ($30,000 if you’re age 50 or older). You can also contribute up to $6,500 to a Roth or Traditional IRA ($7,500 for those 50 and older).
Even if you can’t contribute up to these limits, boosting your retirement savings can help you retire comfortably no matter the future of Social Security. Indeed, adding to your qualified retirement accounts each month can yield meaningful results over time—especially if you invest wisely.
Qualified retirement accounts offer certain tax advantages that allow you to grow your funds tax-free until you withdraw them in retirement. This benefit amplifies the power of compounding, which can boost your savings long-term.
If you don’t plan to retire in the near term, make sure you’re investing in stocks and other growth-oriented investments, so your retirement funds outpace inflation. On the other hand, if retirement is quickly approaching, make sure your asset allocation reflects your time horizon and risk tolerance.
Lastly, if you’re already retired, consider investing in bonds and/or dividend-paying stocks to offset a potential reduction in Social Security benefits. While these types of investments aren’t risk-free, they can still be meaningful and potentially tax-efficient sources of income in retirement.
Satori Wealth Management Can Help You Retire Confidently and Securely
While the future of Social Security is uncertain—and may be for some time—you can still achieve a financially secure retirement with proper financial planning. An experienced financial advisor like Satori Wealth Management can help you identify and implement strategies to preserve and grow your money over time, so you don’t outlive your financial resources in retirement.
To see if we may be the right fit for your financial planning needs, schedule your free RetireNow™ Checkup today. We look forward to hearing from you!
Danny G. Michael is the founder and CEO of Satori Wealth Management, Inc. He has 20 years of experience in retirement planning working with individuals, families, and business owners.