The Truth About Social Security’s Financial Health

As we approach another election year, the future of Social Security becomes a hot topic of debate. While the fear of Social Security going bankrupt is often sensationalized, the reality is more nuanced. Social Security is not on the brink of bankruptcy; however, it faces significant long-term funding challenges that must be addressed to ensure future retirees receive their benefits.

Social Security benefits are funded primarily through payroll taxes collected from today’s workforce. These funds are deposited into the Old-Age and Survivors Insurance Trust Fund, from which benefits are distributed. It’s a pay-as-you-go system, meaning benefits can continue to be paid as long as people are working and paying payroll taxes.

The challenge lies in a long-term funding shortfall. Historically, Social Security collected more in payroll taxes than it paid out, building a substantial reserve. However, since 2021, the program’s costs have exceeded its income, causing it to dip into these reserves. Projections indicate that by around 2033, these reserves could be depleted, potentially reducing benefits by about 23%.

Several factors contribute to this issue:

• Demographic Changes – Fewer workers are paying into the system for each person drawing benefits. In 2022, there were 2.7 workers per beneficiary, but this is expected to drop to 2.3 by 2035.
• Increased Life Expectancy – People are living longer. A 65-year-old today has a life expectancy of about 20 years, compared to less than 14 years in 1940.
• Income Inequality – A smaller portion of high earners’ income is subject to payroll taxes, reducing the overall tax base.

Congress has a few options to address the funding shortfall:

Increase Tax Revenue: Raising payroll taxes or introducing new tax sources could ensure solvency. For instance, increasing the payroll tax rate from 6.2% to 7.75% could secure funding for the next 75 years. However, this may be burdensome for lower-income workers.

Adjust Benefits for High Earners: Removing the cap on taxable income or reducing benefits for high earners could also help bridge the gap. While these measures could generate significant revenue, they may also face political resistance.

Raise the Retirement Age: Aligning the full retirement age with longer life expectancies could also reduce the deficit. Increasing the retirement age to 70 could eliminate about one-third of the 75-year deficit.

The last significant overhaul of Social Security occurred in 1983 when the full retirement age was gradually increased from 65 to 67. Any new reforms will likely involve a combination of higher taxes, reduced benefits, and an increased retirement age. Acting sooner rather than later would provide more gradual and manageable changes, giving future retirees time to adjust.

Addressing Social Security’s funding issues is crucial for ensuring future retirees receive benefits. While there are no easy solutions, a combination of measures will likely be necessary. The sooner policymakers take action, the more options they will have to implement gradual changes. For more detailed information, visit the Social Security Administration.

Contact J. Blum & Associates Wealth Management to learn more about how these changes could impact your retirement planning and what steps you can take to secure your financial future.

The foregoing material is for information purposes only and does not purport to be a complete description of the material referenced herein, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but there is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Any opinions are those of J. Blum & Associates Wealth Management and not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. There is no assurance that any investment strategy will be successful. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

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