By David Munn, CFP
The uncertainty surrounding the solvency of the Social Security system is growing as official reports forecast a long-expected shortfall drawing closer, and prompt important questions for current and future retirees. These concerns are not unfounded, but should also be considered with full context.
Every year the trustees of the Social Security system release a report detailing the financial status of the program. The most recent report predicted Social Security's Trust Fund is on track to be depleted by 2035. If this happens, the program would only have sufficient income to pay around 79% of promised benefits.
It is crucial to make a distinction between the system running out of money entirely versus the Trust funds being depleted. Social Security's primary source of funding is payroll taxes. As long as individuals continue to work and pay these taxes, the program will have some funding.
The Trust funds are extra savings accumulated when more taxes were collected than were needed to pay benefits. The combination of a declining birth rate, longer life-expectancies and Baby Boomers reaching retirement age have all contributed to the program's fiscal deficit.
That being said, if no changes are made to improve Social Security's financial outlook, there will be a mismatch between incoming revenue and promised benefits. In this scenario, benefit cuts may indeed become a reality unless policymakers take action to address the shortfall.
Several policy measures can help shore up the health of the Social Security system. One approach could involve increasing payroll taxes or the cap on taxable earnings. Another option would be to modify the benefit formula, possibly reducing benefits for higher earners. Additionally, policymakers could choose to gradually raise the full retirement age to account for longer life expectancies.
While the prospect of mitigated benefits might seem daunting, it's worth noting that over the past decades Congress has never allowed a situation where Social Security could not pay full benefits. Therefore, the probability of the government allowing a drastic reduction in benefits is relatively low considering the social and political fallout such action would precipitate.
Waiting for policy reforms, however, should not deter individuals from taking charge of their retirement planning. It would be wise to consider Social Security as just one pillar of your retirement income. Other sources, such as pensions, 401(k) plans, Individual Retirement Accounts (IRAs), and personal savings, should also play significant roles in your strategy.
This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client. This material is not intended as any form of substitute for individualized investment advice. The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own. Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors. Munn Wealth Management, LLC, is registered as an investment adviser (RIA) with the United States Securities and Exchange Commission. Registration as an investment adviser does not imply any certain degree of skill or training. 1323GRC