Social Security Benefits: Will I Get Any?

by | Mar 15, 2024

Social Security is facing a crisis as it heads toward insolvency by 2034. If no changes are made, all Americans would face a 20% cut in benefits across the board. However, there are several possible solutions, but time is of the essence.

In today’s uncertain economic climate, one question looms large for many Americans: Will I Get Social Security when I need it? This concern is particularly serious for those nearing retirement age and younger workers alike. As the landscape of Social Security benefits shifts, it’s essential to understand the current state of the program and how it might impact your financial future.

 

The State of Social Security

According to the latest Social Security Trustees report, the program is facing a significant challenge. As of 2024, Social Security is projected to be just ten years away from insolvency. While this doesn’t equate to bankruptcy, it does mean that by 2034, the program may not be able to meet all its promised benefits with the existing funds.

The current reserve, boasting approximately $2.8 trillion, is expected to be depleted by the end of 2033. This looming shortfall raises concerns about the viability of Social Security for future retirees. If no changes are implemented, all beneficiaries could face a 20% cut in benefits starting around 2034.

However, it’s also important to understand the myths around the future of Social Security. Many people use the term “bankrupt” when describing the future of the program. However, the correct term is “insolvent.” Unless changes are made, Social Security will become insolvent in 2034, not bankrupt. Although there would need to be a 20% cut in future benefits, the Social Security program would then be able to cover its obligations for 75 years beyond 2034, as workers would continue paying Social Security tax.

 

How to Fix the Social Security Problem

Another myth around Social Security is that there is nothing we can do to fix this problem. While the prospect of benefit cuts is worrying, it’s important to recognize that many solutions exist. In fact, there is a calculator provided by the Committee for a Responsible Federal Budget that you can use to build your own solution to close the Social Security.

Obviously, implementing changes sooner rather than later is crucial to stabilizing Social Security’s financial outlook and ensure its sustainability for future generations.

 

Proposed Solutions

I admit that while there are many changes that can be made to the system to fix this issue, not all are popular, but some seem to make good sense. The truth is that each change will likely affect at least one group of people in a negative way, so the challenge is to find a combination of common-sense solutions that minimally affect society.

After evaluating the potential solutions on the calculator mentioned above, I decided to put together a sample solution and explain how impactful each component would be in closing the gap to keep Social Security funded.

 

1. Increase Full Retirement Age

One option involves raising the full retirement age to 69 and indexing it for longevity. Adjusting the retirement age to reflect increased life expectancies could help offset the financial strain on the program. Right off the bat, this is one of those that many may not like, but I think there is good evidence to back up this change. The last time changes were made to the Social Security Normal Retirement Age (or full retirement age) was in 1983, when congress enacted a slow and gradual increase of the NRA from 65 to 67.

According to MacroTrends, the average life expectancy at birth in 1983 was approximately 74.37, which is nearly 5 years less than the average life expectancy in 2024 of 79.25. This shows that life expectancies have continued to increase, but the full retirement age has not. Making this change would solve 38% of the shortfall in Social Security.

Another side note to consider is the age at which someone can collect early retirement benefits, which still sits at 62. However, that age has not changed since the initial law allowing early retirement benefits was passed in 1956 for women, and 1961 for men, meaning that we’ve not adjusted the early retirement age in 63+ years!

 

2. Modify Cost-of-Living Adjustments (COLAs)

Switching to a chained Consumer Price Index (CPI) for COLAs could provide a more accurate reflection of inflation, potentially reducing the strain on Social Security funds.

The current metric used Social Security COLAs is the CPI-W, which is CPI for Urban Wage Earners and Clerical Workers. Some argue that that CPI-W is not the most accurate metric to use, and switching to a chained CPI would solve for 18% of the Social Security shortfall.

 

3. Expand Social Security Taxable Wage Base

Currently, of all wages paid in the United States, approximately only 83% is subject to Social Security taxes. In 2024, only the first $168,600 in wages are subject to Social Security taxes. That means that if someone makes $500,000 in 2024, they are not paying Social Security tax on $331,400.

Expanding the taxable wage base to cover 90% of wages, or in other words, increasing the Social Security wage base, could bolster the program’s revenue stream and would close another 21% of the shortfall.

While it wasn’t an option on the CRFB’s reform tool, I would also be curious to see how a potential “wage base donut hole” might affect Social Security. In other words, keep the wage base the same, but pick Social Security taxes up again once income reaches $1M or more. This would attempt to limit taxes on the upper middle class, and only increase taxes on those earning over $1M per year.

 

4. Diversify Trust Fund Investments

Currently, reserve funds are only allowed to be invested in non-marketable government securities. Exploring alternative investment options, such as stocks or bonds, could increase the returns on Social Security’s reserve fund, extending its longevity and closing another 6% of the gap.

 

5. Reform Social Security Benefit Calculation

Currently, the Social Security Benefit formula is based on someone’s highest 35 years of earnings. Adjusting the formula to calculate benefits based on the highest 38 years of earnings would close another 8% of the overall shortfall, and one could argue would fit well with an increase in the full retirement age. For example, if the new full retirement age was 69, one could start work full-time at age 31 and still get 38 years in. If you started working at age 22, you could still get 38 years of earnings in by age 60, which is two years shy of the aforementioned early retirement age of 62.

 

6. Incremental Payroll Tax Increase

While unpopular, a slight increase in payroll taxes for all earners could also help bridge the funding gap. However, with the items mentioned above, a mere 0.3% payroll tax increase could help close another 9% of the gap.

 

Planning for the Future

As you can see, there are several ways to fix the problem, and most would agree that Social Security remains a critical component of retirement planning for millions of Americans. While benefit cuts are a possibility, they are not inevitable. By understanding the issues and advocating for sensible reforms, individuals can better prepare for their retirement years.

 

Action Steps

To prepare yourself for what’s ahead, here are a few things to consider for your own retirement planning.

First, evaluate your own retirement plan. Have you built-in a scenario that maps out a potential 20% cut in Social Security benefits? If not, that may be something to consider in case you’re wondering if you’re fully prepared and safe to retire.

Second, you can explore and build your own creative solutions using online resources, such as the Social Security Reform Calculator, to craft customized plans tailored to your needs. The plan mentioned is this article is simply one option but may not be the best. Research the possibilities and find alternative ways to protect the future of Social Security and share your solutions with those in authority.

Lastly, consider engaging with lawmakers. As you can see, the types of changes that may be necessary may also not be popular. However, this is a bipartisan issue and responsible action is imperative to avoid future damage. You can help by advocating for responsible reforms that ensure the long-term viability of Social Security.

 

Conclusion

While concerns about Social Security’s future abound, proactive measures can mitigate potential risks and safeguard retirement savings. By staying informed, exploring viable solutions, and engaging with policymakers, individuals can navigate the evolving landscape of Social Security with confidence.

As we confront the challenges ahead, remember that planning and advocacy are key to securing a stable and prosperous retirement for all Americans.

Want more help? Let’s chat.

Joe Allaria, CFP®

Joe Allaria, CFP®

Wealth Advisor | Partner

As featured in The Wall Street Journal, USAToday.com, CNBC.com, Nasdaq.com, and Yahoo Finance.

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