On June 1, The U.S. Social Security Administration announced its trust funds can pay out all Social Security funds through 2035 -- one year later than originally estimated.
After that date, the SSA says payouts will likely be cut to approximately 80% if Congress doesn’t step in and provide financial relief for the program, according to the Administrations Board of Trustees.
Additionally, The Old Age and Survivors Insurance Trust Fund, which funds retirement and survivor benefits, will run out of funds by 2034. After that date, 77% of scheduled benefits will be paid out to American retirees.
The SSA’s Disability Insurance Trust Fund saw some good news as the Trustees noted the program, which pays disability benefits to qualified Americans, is now able to pay full benefits beyond 2057, a date that program administrators had estimated funds would be depleted.
Currently the combined asset reserves of the combined OASI and DI Trust Funds stands at $2.852 trillion, down $56 billion, with some serious funding issues on the horizon.
“The total annual cost of the program is projected to exceed total annual income in 2022 and remain higher throughout the 75-year projection period. Total cost began to be higher than total income in 2021,” the SSA said in a June 2 statement. “Social Security’s cost has exceeded its non-interest income since 2010.”
“The year when the combined trust fund reserves are projected to become depleted, if Congress does not act before then, is 2035 -- one year later than last year’s projection,” the SSA added. “At that time, there would be sufficient income coming in to pay 80% of scheduled benefits.”
Red Flags and Risk
Financial experts say the SSA is doing a good job clarifying program funding realities, but they do see potential risk down the road.
“While the SSA's announcement is good news, it is important to remember that the long-term future of Social Security is not guaranteed,” said Michael Ryan, a financial advisor and founder of the financial literacy site MichaelRyanMoney.com.
“The program faces a number of challenges, including the retirement of the Baby Boomer generation, lengthening life expectancies, and low birth rates. If these challenges are not addressed, the program could face insolvency in the future.”
One of the main factors that determine the longevity of Social Security benefits is the health of the economy, according to Ryan.
“If the economy is strong, there will be more revenue coming into the Social Security Trust Fund, which can sustain payouts for a longer period of time,” he said. “However, if the economy weakens, this revenue will decrease, putting pressure on the Trust Fund.”
Another factor that can impact the longevity of Social Security benefits is demographics. “As the baby boomer generation starts to retire, there will be more people drawing from the Trust Fund,” Ryan noted. “This increased demand can strain the system, leading to lower payouts or even a complete depletion of the Trust Fund.”
Action Steps for Congress
Many Americans don’t completely understand what the SSA means when it says 2034 is the estimated last year of 100% program funding payouts.
“Some believe that all Social Security benefits must automatically decline at this date and that there is no solution to the problem,” said Doug Carey, a chartered financial analyst and president of WealthTrace, a financial planning software company. “But that isn’t true. Congress can still shore up the fund by raising taxes or increasing the age when benefits begin. Although it is likely nothing we will be done in the short-term, they will have to address this as 2034 gets nearer.”
In the meantime, there are a few steps Congress can take to alleviate Social Security payout shortfalls. These three steps are at the top of that list, Carey said.
1. Increase the amount of salary income that can be taxed for Social Security. “Currently the payroll limit for Social Security taxes on salaries, which is 12.4% split between employer and employee, is $147,000,” Carey said.
2. Increase taxes for Social Security from 12.4%.
3. Change how Social Security funds are invested. “Currently they are 100% invested in U.S. Treasuries and earn less than 2% annually, which is less than inflation and means the real rate of return is negative,” Carey added.
What You Can Do To Prepare
While the ball is in Congress’s court on Social Security funding, individual recipients can take some action steps of their own to maximize their Social Security earnings down the road.
“One of the most important things is to start planning early,” Ryan said. “It’s never too early to start thinking about retirement and how you will generate income during that time.”
Make sure you’re contributing to a retirement account such as a 401k or IRA to build a sturdy retirement savings platform outside of Social Security. “The sooner you start saving, the more time your money has to grow,” Ryan noted. “Employers often offer matching contributions, so it’s important to take advantage of that if possible.”
Another route to financial security in retirement is playing your “delay” card.
“If you believe that Congress will indeed keep the Social Security system from cutting benefits, then delaying taking benefits until age 70 is the best strategy for many people,” Carey said. “There’s a break-even life expectancy where delaying taking Social Security makes sense.”
That age is 80 for most people. Consequently, if you think you’ll live past age 80, it could make sense to delay taking Social Security. “This break-even occurs because those who delay until age 70 receive a 24% higher payment,” Carey added.
Additionally, many couples might not know their spouse can receive half of their full retirement age benefits.
“For example, if one spouse worked and the other did not work much or at all, the difference in Social Security benefits earned can be huge,” Carey said. “Let’s say one spouse’s benefits are $36,000 per year and the other’s is only $10,000. The spouse with the $10,000 annual benefit should not claim his or her own benefit. He or she should claim half of the spouse’s benefit, which would be $18,000 annually.”
It’s a good idea to run these scenarios through a comprehensive retirement plan to see if delaying makes sense.
“Spreadsheets and most free Social Security calculators are not enough because they don’t take into account all of the complex and interactive factors that go into such an important decision,” Carey said.
