How Secure is Social Security?
CERTIFIED FINANCIAL PLANNER™ Professional
On October 10th, 2019 the Social Security Administration announced a cost of living adjustment (COLA) to those who receive Social Security and Supplemental Social Security Income (SSI) benefits.
Social Security benefits will increase by 1.6% for 2020. This increase will affect the approximately 67 million Americans that currently collect some sort of Social Security retirement, disability or survivor benefit.
As financial advisors, our clients often ask us questions regarding the safety of Social Security: Will it be around when I am nearing retirement age? How much will I receive? What will happen if the system fails?
This article explains how Social Security works, explores what changes may be coming, and offers ideas to help you design a retirement savings strategy.
Looking Ahead to Changes in Social Security
The Social Security system is designed to pay-as-you-go, meaning that today’s workers are paying the benefits of today’s retirees. It is no secret that demographic trends create a potential conflict for Social Security, that is, life expectancy is increasing while birth rate is decreasing. The result is that over time, fewer workers will be supporting more retirees.
According to the Social Security administration, the law governing benefit amounts may change because, by 2035, the combined trust fund reserves are projected to become depleted. Payroll taxes collected will be enough to pay only about 80 cents for each dollar of scheduled benefits.
How is Social Security funded by today’s workers?
Social Security is funded through a Social Security payroll tax, with half being paid by the employee and half being paid by the employer. If you are self-employed, you pay all of the Social Security payroll tax. The first $137,700 (in 2020) of an individual’s income is taxed. These taxes are collected by the Social Security Administration and put into a trust used to pay out current benefits.
How much Social Security benefits do retirees receive?
The amount of retirement benefit received is based on the average earnings over the retiree’s working years. Higher earnings result in higher benefits, and vice versa. The age at which you start receiving benefits also affects how much you may receive. The full retirement age (FRA) is in the process of increasing to 67. Your birth year determines your FRA. If you start taking benefits prior to your FRA, the benefit amount will be reduced permanently. Check here to find your full retirement age.
How can we address the shortage of Social Security funding?
Both members of Congress and the President are aware of the shortage and have pledged to support efforts to reform Social Security. The political process is controversial, and therefore little progress has been made on the issue. There are no easy answers on the topic, but here are some solutions that have been proposed:
- Reduce future benefits
- Change the benefit formula for calculating benefits
- Raise the full retirement age
- Raise ceiling on the wages currently subject to payroll tax
- Raise payroll tax
While the final outcome for the Social Security system is uncertain, your financial future is still in your hands.
Personalized Planning for Your Retirement Strategy
Start saving for retirement as soon as possible. You can do so by contributing to tax-deferred vehicles such as IRAs, 401(k)s, and other employer-sponsored plans. Your goal should be to begin building up enough assets to provide adequate income to meet your needs throughout retirement. To accomplish this goal, you’ll need a customized financial plan. That’s where we can help.
If you have questions about preparing for your financial future, the advisors at Morey & Quinn Wealth Partners can help guide you.
- Are you ready for retirement?
- If you’re already retired, will you have enough?
- What to do if you find yourself 'suddenly single?'
- What should you do if you receive an inheritance?
- Are there options beyond a 401K?
- Do you have a financial plan to take care of your family?
If it’s important to you, it’s important to us.
The team at Morey & Quinn Wealth Partners helps individuals, families, and business owners plan for their financial futures. If you are just starting out, nearing retirement, or have questions about changing markets, come see us for answers. We take the time to listen and personalize your financial plan, adjusting for changes and sharing your progress along the way. Schedule a free discovery session, and start seeing the value of a Well Planned Life.
Morey & Quinn Wealth Partners
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Any opinions are those of Katie Bruno, and not necessarily those of RJFS or Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Investing involves risk and you may incur a profit or loss regardless of strategy selected.
Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional.