Those of you that are on Social Security saw a nice increase in your monthly benefit this year.
Checks went up 5.9% due to a cost of living adjustment from the higher inflation we have all been experiencing. And since inflation isn’t going away any time soon, we should be seeing another payment increase in 2023.
Even with these increases, we most likely can’t rely solely on Social Security in retirement. If, for example, you turned 70 this year and began taking Social Security and you received the highest possible benefit, your monthly check (before taxes or Medicare) would be $4,194. According to the Social Security Administration, in 2022, the average monthly check is $1,666.491.
That being said, Social Security is considered an important part of most people’s retirement income. In 2020 alone, 69.8 million Americans received benefits from programs administered by the Social Security Administration (SSA), with 5.8 million new people receiving some form of Social Security in that year alone.2
Since Social Security was never meant to fully fund one’s retirement, it is imperative that one has a plan to cover expenses above Social Security. If you aren’t sure you are on track for a comfortable retirement, feel free to reach out to me and we can talk about it.
Social Security is funded largely through payroll taxes on a “pay-as-you-go” model, with the current workforce’s contributions being used to fund the benefits for the current Social Security benefits. The plan, as well as the hope, is that by the time today’s workforce is set to retire, the younger generations will still be contributing to the program to fund Social Security for the next generation of retirees.2
In the 2021 annual report of the Social Security Board of Trustees announced that funds for Social Security would be exhausted by 2034. This was a year ahead of the projections made in the previous year’s report. While this announcement may seem alarming, what this actually means is that cash reserves for the program will be exhausted, and retirees in 2034 could see their benefits reduced to 78%.3,4
It is difficult to say for certain what the future of Social Security will be. The hope is that Congress will act in time to resolve this shortage of funds problem. Regardless of what happens to this program, it is important to make sure that you have other strategies in place for your retirement (As mentioned above) so that, irrespective of the developments in Washington concerning Social Security, you can enjoy your retirement years
What can Congress do to help mitigate this problem? Here is where my two predictions come in.
Social Security is and will be an integral part of providing income in retirement to folks. Any threats to the health of the system would affect people regardless of their political affiliation. Therefore (In my opinion), I don’t believe Congress will let that happen.
So, what could they do? Here are a couple of ideas:
- Increase the Full Retirement Age (FRA)
Currently, if one was born after 1960, their FRA is age 67. One can collect as early as 62 however, their benefit is reduced about 30% than if they collected at their FRA. If one waits until age 70 (The latest one can collect), their benefit increases. When we are working with clients, unless one is having a financial hardship, we generally don’t recommend collecting before one’s FRA. There are a few reasons why this is important, and you can read more about that in a previous blog, "The optimal age to begin Social Security" click HERE
Congress could easily raise the FRA to 68 for example. They could also increase the early age from 62 to 63.
- Increase the “Maximum Taxable Earnings”
What is this you may wonder? When one is working, tax is owed on your income up to a certain amount that goes into Social Security. The good news, is you are only taxed on up to $147,000 of earnings (for 2022). This "wage base" goes up each year. For example, in 2021 it was $142,800. (Unlike SS, all earnings are taxed for Medicare.)
One idea would be to increase that amount. Let’s say to $400,000. Or Congress could say, we will keep it as is. However, for those that earn more than $400,000, they will pay additional taxes. (I think the latter is a real possibility).
I don’t believe the funds will run out in 2034 as there is too much on the line politically. I guess we will have to wait until then to see if my predictions ring true.
Feel free to reach out to me if you have any questions. I’m here to help.
Here’s another piece you may find of interest “5 Social Security Myths” Click HERE
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All the best.
Rick Fingerman, CFP®, CDFA™, CCPS®
*These are merely predictions and should not be construed as certainty.
Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page.