FOR MOST AMERICANS, Social Security has represented nothing more than some unavoidable payroll deduction with the positively cryptic initials of “FICA” and “OASDI” (Federal Insurance Contributions Act and Old Age, Survivors and Disability Insurance). It hinted at a future that seemed both intangible and far away. Yet, many Americans now sit on the cusp of drawing on the promise that was made with those payments.
As the growing wave of citizens approach retirement, questions and concerns abound. Is Social Security financially healthy? How much will my income benefit be? How do I maximize my benefits for me and my spouse? When should I begin taking Social Security?
Questions & elephants
Answering these questions may help you derive the most from your Social Security benefit and potentially enhance your financial security in retirement. Before you can answer these questions, you have to acknowledge the elephant in the room.
The Social Security system has undergone periodic scares over the years that have inevitably led many people to wonder whether Social Security will remain financially sound enough to pay the benefits they are owed.
Reasonable concern
Social Security was created in 1935 during Franklin D. Roosevelt’s first term. It was designed to provide income to older Americans who had little to no means of support. The country was mired in an economic downturn, and the need for such support was acute.1
Since its creation, three basic developments have led to the financial challenges Social Security faces today.
1. The number of workers paying into the system (which supports current benefit payments) has fallen from just over 8 workers for every retiree in 1955 to 3.3 in 2005. That ratio is expected to fall to 2.1 to 1 by 2040.2
2. A program that began as a dedicated retirement benefit later morphed into income support for disabled workers and surviving family members. These added obligations were not always matched with the necessary payroll deduction levels to financially support these additional objectives.
3. Retirees are living longer. As might be expected, the march of medical technology and our understanding of healthy behaviors have led to a longer retirement span, potentially placing a greater strain on resources.
Beginning in 2010, tax and other noninterest income no longer fully covered the program’s cost. According to the Social Security Trustees 2014 annual report, this pattern is expected to continue for the next 75 years; the report projects that the trust fund may be exhausted by 2040, absent any changes.3
Social Security’s financial crisis is real, but the prospect of its failure seems remote. There are a number of ways to stabilize the Social Security system, including, but not limited to:
• Increase payroll taxes: An increase in payroll taxes, depending on the size, could add years of life to the trust fund.4
• Raise the retirement age: This has already been done in past reforms and would save money by paying benefits to future recipients at a later age.
• Tax benefits of higher earners: By taxing Social Security income for retirees in higher tax brackets, the tax revenue could be used to lengthen the life of the trust fund.
• Modify inflation adjustments: Rather than raise benefits in line with the Consumer Price Index (CPI), policymakers might elect to tie future benefit increases to the “chained CPI,” which assumes that individuals move to cheaper alternatives in the face of rising costs. Using the “chained CPI” may make cost of living adjustments less expensive.
Reform is expected to be difficult since it may involve tough choices—something from which many policymakers often retreat. However, history has shown that political leaders tend to act when the consequences of inaction exceed those of taking action.
1. PewResearch.org, 20201. Social Security Administration, 2020
2. Social Security Administration, 2020
3. Social Security Administration, 2020
4. Social Security Administration, 2020
Citizen Advisory Group is a comprehensive financial services firm that helps Northwest Ohio and Southeast Michigan’s soon-to-be-retired and retired residents effectively plan for and prepare for life’s greatest journey. In addition to helping clients with their finances, Citizen Advisory Group offers monthly health and wellness events.
Please call 419-872-0204 for a complimentary consultation to review your individual situation. Investment advisory and financial planning services offered through Advisory Alpha, LLC, a Registered Investment Advisor. Insurance, Consulting, and Education services offered through Citizen Advisory Group. Citizen Advisory Group is a separate and unaffiliated entity from Advisory Alpha.
