Fixed Income

Future Changes in Social Security

BY Ty Flores TIMEJune 6, 2022 PRINT

For decades, Social Security has been the bedrock for many Americans’ retirement plans. In 2021 alone, Social Security paid over $1 trillion to its over 70 million beneficiaries.

However, for over a decade, the Social Security Administration (SSA) has been raking in less revenue than it pays out to its beneficiaries, resulting in the system tapping into its reserves.

This alarming direction is gaining more attention every year and begs the question: what does the future hold for Social Security?

2035 will be an Interesting Year

According to the 2021 Social Security Trustees annual report, Social Security will run out of funds by 2034, upon which benefits will subsequently be slashed by 22 percent. The latest report shows that the Social Security will live to see another year before its trust funds cumulatively run out of money, according to the Social Security and Medicare Board of Trustees report released on June 2. 2022.

While this does not appear to be a positive forecast for the program, Congress still has over a decade to implement change. Retirees sustaining on only 78 percent of their benefits are unlikely to be popular for any politician’s campaign.

a woman looks up social security benefits on a computer
Social security benefits are important to everybody, but it will run out of funds by 2035. (Rawpixel.com/Shutterstock)

Changes are Likely Coming for Full Retirement Age

Thus far, the most significant change to Social Security implemented by Congress has been to delay the retirement age. In the early eighties, Congress passed legislation to gradually increase the full retirement age from 65 to 67. For beneficiaries born in 1960 and after, the full retirement age has been scaled to 67.

Given the current predicament and dire predictions, the full retirement age will likely be increased again before we reach 2034.

Increasing the requirement for full retirement age is a likely option, and it seems practical. In 1940, the life expectancy of a 65-year-old was roughly 14 years. In 2022, this life expectancy has jumped to just over 20 years. Life expectancy is increasing, as well as the age group; the number of Americans aged 65 and older will increase from roughly 57 million in 2021 to about 76 million by 2035.

Though raising the full retirement age is a solution that has been proposed many times, it is not without its criticisms. Many Americans elect to draw from their benefits as soon as they are eligible at age 62, and many do so because they have no other choice.

Choosing to draw at age 62 rather than, say, age 67, if that were your full retirement age, would result in a roughly 30 percent slash in benefits. Raising the maximum benefits age even higher will only further diminish the amount of money received by those choosing to draw at age 62.

Increase Taxes

As it stands now, you pay a 6.2 percent Social Security tax on your wages until what you have earned hits the maximum taxable amount, which is akin to an earnings test for those already drawing, is adjusted every year. The maximum amount of income taxable for these taxes in 2022 is $147,000, up from $142,800 in 2021 and $137,700 in 2020. The cap on this tax has nearly doubled since 2000 when it was only $76,200.

Some experts have proposed eliminating this cap on maximum income altogether to raise more revenue from taxes.

Another option proposed is to increase the payroll tax. Data from some preliminary polls have suggested that Americans would be fine with slight increases in payroll taxes, as long as their benefits would not be cut. If true, then this is a rare case of Americans being open to increases in taxation.

Epoch Times Photo
Some experts have proposed solving the Social Security Funds’ issue on maximum the taxable income altogether to raise more revenue from taxes.. (RomanR/Shutterstock)

How Should This Affect Your Plans?

Increases in the full retirement age are likely and have been put into effect in the past. Tax increases seem almost inevitable, particularly if Americans are even lukewarm to the idea. Slashing benefits will undoubtedly be unpopular, although the most pragmatic solution is likely a combination of all three.

The Social Security system is a system with many moving and changing parts. While it may be underfunded now, it has been overfunded in the past and likely will again. Adjusting to the times is par for the course.

However, focusing on what is in your control is always a stellar option amongst the uncertainty. While Social Security has been a stalwart for many Americans in retirement, it is hardly the only option.

For those planning on Social Security being a significant source of their retirement, there is still ample time for legislation to be passed and change to be implemented. While Congress handles Social Security, future beneficiaries would be wise to pay more mind to their other investments. Payroll and Social Security taxes are automatically taken from wages, although employer-sponsored 401(k)’s and IRA’s allow more autonomy.

Despite these additional options to save for retirement, many Americans do not take full advantage.

According to a Vanguard analysis in 2020 of 4.7 million participants, only 12 percent of those contributing to their 401(k) plan were maxing out their contributions. Their study found that the majority of participants maxing out their plans were older and were subsequently closer to retirement. This principle should be followed as early as possible in order to maximize the amount of funds grown in retirement accounts by the time retirement rolls around.

Epoch Times Photo
We might need to modify our retirement plan according to the Social Security’s fund issue. (goodluz/ShutterStock)

While speculation and educated guesses are a routine part of any investment, predicting what Social Security will be like in a decade with certainty is almost as vain as predicting what the stock market will be doing in 2032.

However, in maximizing other investments and bolstering them as much as possible and as early as possible, any adverse changes in Social Security will be far less harmful. Diversifying your portfolio with different streams of income helps ameliorate any contentious changes

The Epoch Times Copyright © 2022 The views and opinions expressed are only those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.

Ty Flores
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