Preparing for retirement is a career long undertaking that, if done well, can yield a return sufficient enough for you to spend your sunset years comfortably. While it is not the only available option when planning for your retirement, the Social Security program is perhaps the most popular insurance program with many working Americans hoping to claim benefits from it in the future.
The unfortunate truth of the matter is that relying solely on Social Security to get you by during your retirement may not be the wisest move with the way things are currently standing. The latest annual report from the Social Security Board of Trustees has revealed that the projected long term finances of the Social Security program are, in fact, worsening.
Funding for the program has long been an issue, however, as per the latest estimates in the annual report, if Congress does not intervene with a solution soon, a major trust fund used to pay benefits to millions will be emptied by 2033. This will then trigger an automatic cut to benefits which could, in turn, cause significant financial harm to the households who depend on their monthly Social Security income to get by. Here is what you need to know, as well as other options worth exploring when mapping out your retirement fund.
Projected shortfall of the Social Security program
Social Security has three main sources of funding. Primarily, the program is funded by means of a dedicated payroll tax which workers pay into throughout their career. Supplementing this revenue are two major trust funds: the Old Age and Survivors Insurance trust fund, and the Disability Insurance trust fund. According to estimates in the report, the Disability Insurance trust fund is expected to continue paying out 100% of all scheduled payments for the full projection period ending in 2099.
The funding issue lies with the Old Age and Survivors Insurance trust fund which is expected to become insolvent as soon as 2033 if no change is enacted to the program in the present. If the OASI trust fund does become depleted, an automatic cut to benefits will be triggered and only 77% of all scheduled benefits will be paid out using the remaining revenue in the program.
As in the previous year’s report, this year’s report once again poses the possibility of combining both trust funds into one OASDI fund. Projections for the combined fund have estimated that it will become insolvent by 2034, a year earlier than the estimations in the previous report. At this point, the remaining revenue in the program will only be sufficient to cover 81% of all scheduled benefits.
Possible solutions to this issue are currently being debated by lawmakers, however, nothing has been decided for certain. Some options lawmakers have put forward include increasing the Full Retirement Age further, lifting the wage cap, or increasing the rate for Social Security payroll taxes. A pair of senators have also put forward a bipartisan proposal of creating a new investment fund. This fund would, however, require an upfront invest from the Treasury of $1.5 trillion to be invested over a 75 year period.
Look at other options
Thanks to the way that the Social Security program is set up and funded, it can never go bankrupt entirely, however, as explained above, benefit cuts are a real possibility if a solution is not found to the funding issue. For this reason, it is would be wise to explore alternate options to supplement your retirement income such as an IRA or 401(k).
These options can be especially worthwhile if you are still early on in your career as you will have many years to grow your investments thereby allowing you to have a sizable nest egg for your later years.