In Mid-August, the Social Security program celebrated its 90th year of providing the most vulnerable of America’s citizens with financial security. The program was first introduced in 1935 with the aim of preventing elder poverty and has since grown into a program that supports tens of millions of individuals during their retirement, or in the event of becoming disabled, amongst others.
A significant number of seniors rely primarily, or even solely, on their monthly Social Security benefit income to cover their expenses. As such, any disruptions or cuts to benefits could have a severely detrimental impact on the finances of these households. In fact, according to a recent Nationwide Financial Survey, “more than half of Social Security recipients wouldn’t financially survive if they missed even half of a monthly payment.”
The unfortunate news for these vulnerable beneficiaries is that the Social Security program at large is in big trouble financially and if Congress does not intervene in the present day, an automatic cut will likely be triggered across all benefits. Here is what you need to know.
Social Security projected shortfall date moves up
In the latest annual report from the Social Security Board of Trustees, it is stated that that long term finances of the program are indeed worsening and intervention from Congress is needed. Social Security has three main sources of revenue:
- The dedicated Social Security payroll tax: 6.2% of a worker’s earnings are paid into this payroll tax, and their employer pays in another 6.2%, making the total contribution 12.4%.
- The Old Age and Survivors Insurance trust fund
- The Disability Insurance trust fund
Since the two trust funds act as supplemental sources of revenue to the revenue of the payroll tax, the program can never go truly bankrupt because there will always be new people entering the workforce and paying into the payroll tax. However, the program cannot survive on the payroll tax alone and according to the trustees’ report, the Old Age and Survivors Insurance (OASI) trust fund is projected to be depleted by 2033.
At this point, a 23% cut will be triggered to benefits. The report also poses the possibility of combining the two trust funds into one OASDI trust fund. “If the OASI Trust Fund and the DI Trust Fund projections were combined, the resulting projected fund (designated OASDI) would be able to pay 100 percent of total scheduled benefits until 2034, one year earlier than reported last year. At that time, the projected fund’s reserves would become depleted, and continuing total fund income would be sufficient to pay 81 percent of scheduled benefits,” as per the report.
What should retirees do?
At present, a number of possible solutions are being debated by lawmakers, however, nothing has been decided for certain yet. These projected shortfalls are still just projections and a lot could change between now and 2033. As such, if you are still working or nearing retirement, now is the time to be proactive so as to ensure the stability of your retirement income.
The obvious first step would be to try and boost your other retirement savings by increasing your IRA contributions or contributing more to your employer’s 401(k) plan, for instance.
If you are already retired but are concerned about the potential benefit cuts, another option that could be beneficial is to continue working in lighter capacity. Between a a job in the gig economy, for example, and living frugally, you could build up a nice, modest lump sum which you could then invest.
Another cost cutting option would be to downsize your home. This will likely reduce property taxes, upkeep expenses, and insurances premiums, thereby allowing you to have a bit of extra cash leftover each month.