While change may be an inevitable facet of life, when it comes to your retirement income, surprises are not particularly desirable. This is why it is always worth staying in the loop with regards to matters at the Social Security Administration (SSA), especially if you are nearing retirement or are already retired and earning benefits. The most notable point of concern on everyone’s mind lately is the projected insolvency of a major Social Security trust fund as outlined in the latest annual report by the Board of Trustees. If a sustainable solution to prevent this shortfall is not found by lawmakers, beneficiaries will be hit with benefit cuts in the not too distant future.
According to the annual report from the Social Security Board of Trustees, the Old Age and Survivors Insurance (OASI) trust is projected to become insolvent by 2033 if change is not enacted to the program now. It is important to note that the Social Security program cannot become entirely insolvent due to the way its funding is set up. If, however, either of the two major trust funds do happen to become insolvent, beneficiaries will be hit with a substantial cut to their benefits. As such, a number of potential solutions are currently being debated by lawmakers. Here is what you need to know.
Will Social Security become insolvent?
The good news is that Social Security can never become fully insolvent because it is primarily funded through a payroll tax. In short, there will always be individuals in the work force who pay into the Social Security payroll tax, and as such, there will always be a steady stream of revenue. The revenue from the payroll tax is supplemented by two trust funds as well: the OASI trust fund, and the Disability Insurance (DI) trust fund.
In recent years, the number of seniors reaching retirement and claiming Social Security has been growing at a higher rate than that of younger individuals entering the workforce and paying into the Social Security payroll tax. As a result, the program has had to rely more on revenue from its trust funds to pay out benefits. Consequently, the OASI trust fund is now projected to become insolvent by 2033, triggering an automatic 23% cut to benefits.
Alternatively, if the two trust funds are combined into one OASDI fund, the shortfall will occur in 2034 and result in a 19% cut to benefits. In short, if change is not enacted now, a benefit cut is inevitable.
Potential solutions
Lawmakers are currently working on a solution to prevent this shortfall. Included in the possible changes to the program are:
- Raising the full retirement age to 69. The retirement age is currently 66-67, and rumors that the retirement age is going to be raised again have already sparked major criticism from lawmakers and advocates.
- Slowing COLA increases, however, this is something that the SSA has already been doing for years causing any seniors to feel frustrated as it is.
- Means-testing beneficiaries
- Increasing FICA taxes which currently stand at a combined 15.3% for Social Security and Medicare.
- Removing the cap on FICA taxes entirely, which means high earners would pay on their total earnings thereby generating higher revenue for the program
What should you do?
The final outcome will likely be some sort of amalgamation of the aforementioned proposed solutions. As such, it may be in your best interest to prepare alternate sources of income for your retirement. You will, of course, still receive a benefit from Social Security but the amount may not necessarily be enough for you to depend solely on it. Investing in stock or real estate may not be feasible for every individual, but looking into these kinds of alternate investments may yield you a sustainable stream of income that could help support you in your retirement.