Social Security won’t go away, but don’t count on it
Americans are convinced that they can put themselves in a position for a successful retirement. They are just worried that the government is not living up to its end of the bargain.
Some 72% of Americans expect to have had a successful career by the time they call it, and 71% say they understand how much they can spend now versus how much they should save for later, according to a survey by 2022 from Northwestern Mutual.
But just over half – 56% – say they expect Social Security to be there when they need it.
They are not wrong to be skeptical. The Social Security Administration estimates that excess reserves in the trust fund from which benefits are paid will be depleted by 2034.
“There’s a fear out there that his burnout will mean he’s gone, but it would be political suicide to remove the benefit,” says Beau Henderson, retirement specialist at RichLife Advisors.
But even if it doesn’t disappear in its entirety, Social Security could be reduced or governed by different rules as Millennials and Gen Z investors retire, experts say.
With that in mind, here’s how finance professionals say you can safely incorporate Social Security into your retirement plans, and why it’s worth starting to monitor, even if you’re young.
Social Security is drying up, but is not likely to disappear
If Americans are worried that Social Security is running out of money, it’s because the program is, in some way, running out of money.
Social Security is funded by payroll deductions. Currently, salaried workers and employers each pay a 6.2% tax rate for the program, while the self-employed cover the full 12.4%.
But the money you invest is not set aside specifically for you. Instead, it goes into a trust fund that pays out to current beneficiaries, such as retirees, survivors of deceased workers, disabled workers and their dependents.
Currently, the amount of money collected through payroll taxes exceeds the benefits the program pays out. But that’s about to change as more of the massive baby boomer generation retires. If excess trust fund reserves are depleted by 2034 as planned, the SSA will have to start paying 78% of full retiree benefits.
Rather than letting the program shrink completely, “Congress is more likely to make changes and get the box on the road,” Henderson says.
Possible adjustments he is considering include raising the age at which benefits kick in, effectively forcing retirees to wait longer to claim benefits in order to maximize their payout. The full retirement age is now 67. [for those born in 1967 or later]. For the youngest, it may be more like 70 years old. Instead of early benefits at age 62, it may be age 64.
Youth and Social Security: ‘It’s not your grandparents’ retirement’
Age thresholds for Social Security are a major factor in retirement planning because the age at which you start claiming benefits affects the amount of benefit you get.
Currently, a worker can retire as early as 62, but this can lead to a 30% reduction in their benefits. Conversely, if you wait to collect your benefits after reaching full retirement age, your payment will increase by 8% per year until you reach age 70.
These ages may seem remote for young investors. But the changing rules Henderson talks about would have a big impact on your long-term plans, because most financial planners take Social Security payments into account when calculating how much you’ll need to invest to earn a particular income in retirement.
If you expect to receive a reduced payment or have to wait longer for it, you may need to invest more now.
Investing as much as you can while you’re young really should be the goal, says Henderson. Gone are the days when most workers’ wallets were part of a “three-legged stool”, bolstered by social security and a private pension.
“It’s not your grandparents’ retreat,” he says. “But you still have time to enjoy time and composition.”
In other words, your portfolio will do a lot of the heavy lifting when you need income in retirement.
“The average household doesn’t start getting serious about retirement until it’s on the horizon,” Henderson said. But, “if you start building assets early, that Social Security benefit is like icing on the cake.”
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