The annual Social Security beneficiary report was recently released and just like every other year that they release it, it has caused people to worry about their future. Social Security is a crucial, foundational element of most retirement income plans, so when you read headlines that it will run out soon how should you react?
Should you go about changing your retirement plans altogether? Should you file for Social Security early to ensure you get the most out of your benefit? We’ll explore these questions in this episode of Retirement Starts Today.
The recent report released by the government was unsurprising to anyone who has been paying attention. This year’s statement revealed that the Social Security trust fund will ‘run out of money’ in 12 years which is one year sooner than previously anticipated. The time frame has been accelerated due to the Covid pandemic.
The issue of ‘running out of money’ is caused by a math problem. There are insufficient people entering the workforce to support the increasing number of baby boomers that collect Social Security each month. The record unemployment rates during the pandemic resulted in even fewer people contributing to the Social Security fund.
There is a myth that there are fewer people in the generations succeeding the baby boomers than there are in the baby boomer generation, but this myth isn’t true. There are actually more people in each of the generations that follow the Baby Boomers. So, the problem isn’t due to a lack of work-age people. It is due to a lack of funding.
Before I continue, I need to address the wording that everyone uses surrounding the shortage in Social Security funding. It is commonly stated that Social Security will run out of money. However, Social Security cannot run out of money while workers continue to pay into it. The issue is that there won’t be enough income coming in to support the money going out to the beneficiaries. This means that there will be a reduction in benefits rather than a complete lack of funds.
There are two ways that Congress could alleviate the Social Security funding problem. They could increase payroll taxes beyond the current $142,800 cap or they could increase the percentage of the 12.4% payroll tax that comes from each worker.
Hopefully, now you aren’t worried about the complete elimination of the Social Security program, but you may still be concerned about getting a Social Security pay cut in retirement. Many people feel pulled to file early so that they can get into the program as soon as possible. However, if there is a reduction in Social Security benefits those people will be taking a cut on an already reduced benefit.
If you wait until age 70 to collect your Social Security payment you will receive 132% of your original benefit. So if there does end up being a reduction in the Social Security program, then you will end up taking a cut on an increased amount.
What would you prefer--taking a cut on a cut or a cut on a larger amount?
Don’t let sensationalist headlines dictate your retirement plans. Create your retirement plan based on your own unique needs. By maintaining a long-term focus you could end up saving hundreds of thousands of dollars in opportunity costs.
Subscribe to Retirement Starts Today on
Apple Podcasts, Stitcher, TuneIn, Podbean, Player FM, iHeart, or Spotify