Contributed by: Kelsey Arvai, CFP®, MBA
Contributed by: Nick Errer and Ryan O'Neal
No, social security won't run out, at least not entirely. As a result of changes to Social Security enacted in 1983, benefits are expected to be payable in full until 2037. When these reserves are used up, continuing tax revenues are expected to pay 76% of scheduled benefits. What is causing the financial status of the Social Security Fund to shortfall? Americans have fewer children, live longer, and have an aging population of Baby Boomers retiring at a record pace, further lowering the workforce.
Many discussions have surfaced about how Congress will address the issue of an insolvent Social Security fund. Because we are currently in an election term, it is unlikely that any immediate action will be taken, but these are likely the eventual options on the table, barring any other creative solutions.
Payroll Taxes may increase. The current Social Security tax rate is 12.4%. For most Americans who are W2 employees, this is split 50/50 between the employer and employee. An increase of 1% for both parties would bring the total rate up to 14.4% and substantially improve the program's state.
Retirement age may have to go up. There have been no significant changes to the Social Security Program since the full retirement age was lifted from 65 to 67 in 1983. Since then, the average life expectancy in the United States has risen from 74.6 to 77.5 years old. A slight increase in the full retirement age represents how much longer people live today. Another increase would extend the fund substantially.
Benefits may get cut. Like any other struggling budget, there are two ways to fix it. One can either increase revenues or decrease spending. Rather than increasing revenue via payroll taxes to improve the state of the Social Security Fund, policymakers may decide to lower the maximum benefit individuals may receive. While this option would face scrutiny in the current high-price environment, it is certainly on the table.
In today's political environment, it is astute to structure your retirement portfolio to accommodate at least 30 years of retirement or longer. You can do this by creating a savings plan and choosing the right mix of investments (also known as a portfolio allocation). Individuals may rely on several fixed income sources besides Social Security in retirement, such as annuities, pensions, rental properties, or other recurring sources. Maintain at least one year of cash in a relatively safe, liquid account, such as an interest-bearing bank account or money market fund. Next, create a short-term reserve in your investment portfolio equivalent to two to four years' worth of living expenses, accounting for regular income sources or not, depending on how conservative you are. Invest the rest of your portfolio in investments that align with your goals and risk tolerance. The overarching goal here should be to hold a mix of stock, bond, and cash investments that can generate growth, provide income, and preserve your capital—balancing retirement income between social security and other income streams to create a more reliable financial future. Are you looking to implement a retirement income strategy? Reach out to us!
Sources:
https://www.ssa.gov/policy/docs/ssb/v70n3/v70n3p111.html
https://www.investopedia.com/ask/answers/071514/why-social-security-running-out-money.asp
Kelsey Arvai, MBA, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.® She facilitates back office functions for clients.
This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of the author and are not necessarily those of RJFS or Raymond James. Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment or investment decision. Investing involves risk and you may incur a profit or a loss regardless of strategy selected. Past performance is no guarantee of future results. Prior to making an investment decision, please consult with your financial advisor about your individual situation.