You’ve been paying into the Social Security system your entire adult life. At some point, you expect to retire and collect your fair share of benefits. But will the money be there?
Many experts believe Social Security benefits will be reduced or watered down through taxes and other adjustments during the next few decades. Because you may receive less from Social Security, you may need to save more in other retirement accounts.
The Social Security Administration (SSA) says the program’s annual costs will exceed its revenues in 2016. And while the SSA projects that the system’s trust fund will be able to cover the shortfall through 2037, that’s down four years from last year’s estimate. And with unemployment still rising—leading to lower tax revenues to fund Social Security benefits—the deficit could worsen, putting pressure on future payments to retirees.
How will Social Security’s future play out? The system’s financial situation is clearly deteriorating as there are fewer workers to fund retirement benefits for the huge baby boom generation, and there’s little appetite for yet another taxpayer-funded bailout of a cash-strapped government program. Yet the likelihood that Congress would actually approve cuts to a program long known as the third rail of American politics also seems low. If benefit reductions come, it may be through the action of a bipartisan commission charged with solving the system’s financial woes.
In the meantime, de facto cuts have already begun. An earlier Social Security commission recommended raising the full retirement age from 65, and current rules are gradually increasing the full retirement age to 67 for those born in 1960 or later. You can still choose to begin taking benefits as early as age 62, but you’ll receive sharply lower monthly amounts than if you had waited until today’s older full retirement age.
Rising Medicare premiums, normally deducted from a recipient’s Social Security payments, also serve to undercut cost-of-living benefit increases. Moreover, you’re increasingly likely to be taxed on a portion of your Social Security benefits. While only about 30% of current beneficiaries are taxed on benefits, that’s projected to rise to 42% by 2020, and high-income retirees may pay tax on up to 85% of benefit payments.
In this volatile environment it is prudent not to rely too heavily on Social Security to provide a large percentage of your retirement income. With the system’s future uncertain, your benefits could fall, and even the loss of, say, $1,000 a month could have a negative impact on your retirement plan. We can help you reexamine your retirement income projections, recommend strategies for replacing what you might lose from Social Security, and show you strategies for reducing the amount of taxable Social Security benefits.