As the years tick by steadily toward retirement, we all feel a little more comfortable knowing Social Security will be there for us. Or will it? People often speculate about Social Security running out one day.
Will those of us without pensions be able to survive solely on the money we have saved? What about those who haven’t saved enough? It’s scary to think of the Social Security safety net being gone. Here we’ll give a brief Q&A on how Social Security is set up and what experts say is really in store for its future.
1. How is Social Security set up?
Currently, you and your employer each pay 6.2% of your wages into Social Security (up to a taxable maximum of $128,700). If the government collects extra extra money than the amount it needs to pay out, that money goes into something called the Social Security trust fund.
Currently, Social Security is the main source of income for almost half of elderly married couples and 71% of elderly single individuals.
Next: Getting back what you paid in
2. Do I have a personal Social Security account?
No, although roughly one-third of Americans mistakenly think this is the case. The money taken from your paycheck now is given to those who are currently collecting benefits. In turn, when it’s your time to collect, the younger working crowd will pay your benefits. When you retire, your benefit amount is based on the 35 working years when you earned the most money.
Next: A problem arises.
3. Will Social Security run out of money?
Well, not entirely. However, the problem is that by 2035, the program will only have enough revenue coming in to pay 77% of promised benefits, the latest projections say. Experts predict the Social Security trust fund will be depleted by then. The government will be paying out more money than people are paying into the system.
Next: Why the Social Security trust fund is running out
4. Why is the Social Security surplus running out?
Americans are having fewer children and living longer — meaning more elderly people are collecting benefits while fewer working-age people are paying into Social Security. Today there are about 48 million Americans aged 65 and older, while by 2035 that number will be 79 million. At that time, the surplus will be at $0.
“Once [the Social Security trust fund] is gone, the system will only be able to pay the [amount] covered by the payroll tax,” said Alicia H. Munnell, director of the Center for Retirement Research at Boston College. “The system is not going to zero.” In other words, it will go to 77%.
Next: How this will affect you directly
5. How will this affect my Social Security benefits?
Retirees would receive slightly over three-quarters of their Social Security benefits when they retire in the future. For instance, if you were expecting to get $2,000 per month, that amount would shrink to $1,540.
“Without action, current workers and even current retirees will face a 23% across-the-board cut in just 17 years,” said Maya MacGuineas, president of the Committee for a Responsible Federal Budget. “That is when today’s 50-year-olds reach the normal retirement age and today’s youngest retirees turn 79.”
Next: Is there a fix?
6. Would increasing taxes fix the problem?
Instead of cutting benefits, the government could raise the Social Security payroll tax. (As we mentioned, you and your employer currently each pay 6.2%.) It would need to increase by 3.58% to sustain the program., according to the Board of Trustees annual report in 2016.
Alternately, the full-retirement age could go up, and younger generations will have to work longer before collecting benefits. This is more likely than a tax hike, which is unpopular among voters, said Social Security expert Joseph E. Roseman, Jr., from wealth management firm O’Dell, Winkfield, Roseman and Shipp.
7. Are there other ways to fix Social Security?
The government could also reduce the Social Security cost-of-living adjustment (COLA). Currently, Social Security benefits typically increase slightly each year. However, some people predict lowering the COLA would increase poverty rates because it would affect poorer Americans more heavily than wealthier ones.
Next: The future of disability benefits
8. How will this affect disability benefits?
More than 10 million people collected Social Security Disability benefits in 2016. The disability trust fund will be depleted by 2023, according to some projections. At that time, the program will face a benefit cut of one-sixth and a $175 billion shortfall through 2027.
Tax options have been explored to keep the disability fund solvent as well as reforms to the disability program to reduce its costs.
Check out The Cheat Sheet on Facebook!