Older Americans: How Secure Is Social Security?
Older Americans who are already retired or close to retirement age probably have nothing to worry about-- Social Security benefits will likely be paid out in the amount they had planned on (at least that's what most of the politicians say). But what about the rest of us?
The media onslaught
The media is filled with story after story on the health of Social Security. And, depending on the actuarial assumptions used and the political slant, Social Security has been described as everything from a program in need of some adjustments to one in crisis requiring immediate, drastic reform.
Obviously, the underlying assumptions used can affect one's perception of the solvency of Social Security, but it's clear some action needs to be taken. However, even experts disagree on the best remedy. So let's take a look at the facts
According to the Social Security Administration (SSA), over 63 million Americans currently collect some sort of Social Security retirement, disability or death benefit. Social Security is a pay-as-you-go system, with today's workers paying the benefits for today's retirees. (Source: Fast Facts & Figures about Social Security, 2014)
How much do today's workers pay? Well, the first $118,500 (in 2015) of an individual's annual wages is subject to a Social Security payroll tax, with half being paid by the employee and half by the employer (self-employed individuals pay all of it). Payroll taxes collected are put into the Social Security trust funds and invested in securities guaranteed by the federal government. The funds are then used to pay out current benefits.
The retirement benefit is based on one’s average earnings over a working career. Higher lifetime earnings result in higher benefits, so if there were some years of no earnings or low earnings, the benefit amount may be lower than if one had worked steadily.
Age is also a factor. Currently, the full retirement age is in the process of rising to 67 in two-month increments.
It is possible to begin receiving Social Security benefits before full retirement age - as early as age 62. However, early retirement means the Social Security benefit will be less than if at full retirement age... For example, an older American whose full retirement age is 67 who decides to retire at 62 will , receive about 30 percent less than if they waited until age 67 to retire. This reduction is permanent—there won't be a benefit increase at full retirement age.
Even those on opposite sides of the political spectrum can agree that demographic factors are exacerbating Social Security's problems--namely, life expectancy is increasing and the birth rate is decreasing. This means that over time, fewer workers will have to support more retirees.
According to the SSA, Social Security is already paying out more money than it takes in. However, by drawing on the Social Security trust fund, the SSA estimates that Social Security should be able to pay 100% of scheduled benefits until 2033. Once the trust fund reserves are depleted, payroll tax revenue alone should still be sufficient to pay about 77% of scheduled benefits. This means that 20 years from now, if no changes are made, beneficiaries may receive a benefit that is about 23% less than expected. (Source: 2014 OASDI Trustees Report)
While no one can say for sure what will happen (and the political process is sure to be contentious), here are some solutions that have been proposed to help keep Social Security solvent for many years to come:
- Allow individuals to invest some of their current Social Security taxes in "personal retirement accounts"
- Raise the current payroll tax
- Raise the current ceiling on wages currently subject to the payroll tax
- Raise the retirement age beyond age 67
- Reduce future benefits, especially for wealthy retirees
- Change the benefit formula that is used to calculate benefits
- Change how the annual cost-of-living adjustment for benefits is calculated
Members of Congress and the President still support efforts to reform Social Security, but progress on the issue has been slow. However, the SSA continues to urge all parties to address the issue sooner rather than later, to allow for a gradual phasing in of any necessary changes.
Although debate will continue on this polarizing topic, there are no easy answers, and the final outcome for this decades-old program is still uncertain.
The financial outlook for Social Security depends on a number of demographic and economic assumptions that can change over time, so any action that might be taken and who might be affected are still unclear. But no matter what the future holds for Social Security, one’s financial future is still in one’s own hands. Focus on saving as much for retirement as possible, and consider various income scenarios when planning for retirement.
It's also important to understand the benefits, and what one can expect to receive from Social Security, based on current law. This information is available on one’s Social Security Statement, which can accessed online at the Social Security website, www.socialsecurity.gov. This statement contains a detailed record of earnings, and includes retirement, disability, and survivor's benefit estimates that are based on actual earnings and projections of future earnings.
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