The future of Social Security: What you need to know today

Retirement
& Longevity

How
Social Security’s anticipated shortfall may impact you down the road

Social
Security’s outlook continues to raise concerns. But while you may hear the
program is in danger of becoming insolvent, that isn’t the case. The problem
isn’t insolvency – it’s a challenge of changing demographics. Understanding
those changes, and what solutions are on the table, is key for anyone planning
for retirement.

Social
Security benefits are funded by payroll taxes collected from today’s workers.
It’s a pay-as-you-go system; if workers are paying payroll taxes, Social
Security benefits will be paid.

For decades,
the Social Security system collected more in payroll taxes and other income
than the benefits it paid out, creating a reserve. In 2021, when the program’s
costs began exceeding its revenue, it started drawing from this reserve.

When those
reserves are depleted – expected in about 10 years – benefits will be reduced
by an estimated 17%. If Congress takes no advance action, the fund is expected
to be able to pay 83% of current benefits in 2035, declining to 73% in 2098.

Today’s baby
boomers have a greater life expectancy than those in earlier generations. At
the same time, younger generations are getting smaller, meaning fewer workers
are paying into Social Security. And a smaller percentage of Americans’ income
is subject to the payroll taxes funding Social Security because the earnings of
the highest-paid workers have grown faster than those of the average worker.

Sixty-seven
million Americans receive Social Security payments each month – it’s the main
source of income for people 65 and older – making its future important. To
patch the shortfall, Congress has some options.

Option 1:
Increase tax revenue

The most
obvious way to increase Social Security funding is raising payroll taxes.
Employers and employees currently each pay 6.2% for social security. Increasing
to 15.75% shared between employers and employees could ensure solvency for 75
years but that may be unaffordable for lower-income workers.

Another
option is adding new tax sources. The American Academy of Actuaries has
suggested taxing investment income or increasing estate and gift taxes – an
idea likely to face resistance.

Additionally,
the Social Security tax rate applies to annual wages up to $176,100. Removing
that cap and taxing all earned income could eliminate 78% of the shortfall.
Traditionally, earners above $176,100 are subject to a wage cap to prevent
higher taxation that may not justify the benefits. Social Security’s political
support comes from the idea that you can receive back a benefit you have paid
into; removing the cap could undermine that support.

Option 2:
Reduce benefits for high earners

Another idea
is to reduce future benefits for high earners not yet collecting Social
Security, based on the assumption they’ll rely on it less. But this alone
wouldn’t curb Social Security expenditures enough to address the problem.

Option 3:
Raise the retirement age

Today the
full retirement age (FRA) is 66 and two months for those born in 1955,
gradually increasing to 67 for anyone born in 1960 or later. Some lawmakers
propose raising the FRA to 70 to reflect today’s longer life expectancy. This
alone could eliminate nearly a third of the Social Security trust fund’s
75-year deficit. However, working to an older age could be especially
challenging for low-income Americans and those in physically demanding jobs.

No easy
answers

Odds are a
solution would comprise some combination of these actions – higher taxes for
some, lower benefits for some, more years on the job for some. And any proposal
is likely to face opposition. The sooner policymakers act, the more options
they will have, and the more time pre-retirement Americans will have to prepare
for changes.

Kent Pendleton, AAMS®

Financial Advisor, RJFS

Pendle Hill Advisors LLC

14375 Liberty St, Ste 109 | Montgomery,
TX 77356

T 936-297-8267

Kent.Pendleton@raymondjames.com | www.raymondjames.com/pendlehilladvisors

Material
created by Raymond James for use by its advisors. Securities offered
through Raymond James Financial Services, Inc. Member FINRA/SIPC. Investment
advisory services are offered through Raymond James Financial Services
Advisors, Inc. Pendle Hill Advisors is not registered broker dealers and is
independent of Raymond James Financial Services.

Sources:
cbpp.org, asppa.org