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The Future of Social Security

The Future of Social Security

The Social Security Administration periodically evaluates the program’s financial health and adjusts various factors to ensure its long-term sustainability. However, many reports suggest that it will suffer a benefit reduction. It’s no surprise, therefore, that most millennials say they won’t be factoring Social Security benefits into their retirement strategy. They’ve been hearing for years, after all, that the retirement and disability program is going to break down.

This belief is actually based on a number of predictions we’ve been told about. For example, the most recent Social Security Trustees Report, telling us that Social Security’s trust fund reserves will be depleted by 2033. That’s one year sooner than was predicted last year, due to unexpected changes like slowing economic growth.

Some people, though, especially younger Americans, have some misunderstandings about the impact if the trust fund does indeed bust. For starters, this prediction is by no means certain. And, even if the trust fund does deplete, the program will still be able to pay the majority of benefits.

A number of people misinterpret reports, believing that Social Security will become completely bankrupt, and that they won’t receive any benefits at all. However, rest assured, this is definitely not the case.

But still, if the trust fund does run out of money, the program’s 67 million beneficiaries would experience a benefit cut. And experts say that those cuts could still have a devastating impact on millions of older Americans.

How Would It Affect You?

If the trust fund is depleted, there’d be a significant drop in benefits. Specifically, “an immediate drop in benefits of about 25%.” The Social Security benefits paid to lower-wage earners represent a bigger share of their earnings. Because the system is designed this way, a drop would hit low-income Americans the hardest.

“Currently, retirees who were low earners while working — defined as earning about $30,000 a year while employed — get about 50% of their income replaced from their Social Security benefits. But that would drop to about 40% of replacement earnings in 2033 if the trust fund runs out of money.” High earners, meanwhile, would see their replacement rate drop from 25% down to 20%.

At this current time, it seems very likely that the Social Security trust fund will run out of money by 2033. However, it may not. Lawmakers have a number of potential changes they could make. In fact, there are a number of proposals from Democrats, Republicans, and bipartisan committees alike. You see, for example, “Republicans have proposed pushing the retirement age up to 70, effectively cutting between 2 to 3 years of benefits for today’s workers.” 

When to Start Social Security

Many financial analysts suggest that the ideal age for starting Social Security benefits is the latest it can possibly be delayed, even to age 70. However, this conclusion is based on the assumption that benefits won’t be reduced in the future.

When to start taking Social Security, though, depends on your individual situation. You can figure out the answer for you, specifically, using Open Social Security. Open Social Security is a free online system that analyzes optimal claiming strategies.

Open Social Security’s system bases its analyses on the assumption that people will live to their expected lifespans. But, for those who unexpectedly live longer, it’s recommended that they delay the start of benefits more. Unfortunately, your longevity can’t be predicted, obviously.

Examples

Here are a few examples of financial situations, and what type of strategy those in them should apply when it comes to Social Security benefits:

Firstly, for a married couple both turning 62 this year. For them, the optimum claiming strategy is for the husband to start benefits at age 70. The wife, meanwhile, should claim benefits one month after turning age 62.

Then, for a single man turning 62 this year. He should start taking Social Security at the age of 67 years and eight months. The assumed benefit reduction would change this, instead making it optimal for him to file right away.

A single woman’s optimum filing age, meanwhile, went from 68 years and eleven months old, to 67 years and seven months old.

One factor to consider with all of these analyses? Whether you claim Social Security benefits as soon as possible, or delay them for any amount of time, you won’t escape a benefit reduction assuming it takes place. But, it’s better that you get only three-quarters of a larger benefit amount than three-quarters of a small amount. You can at least make the best of a bad situation.

What You Can Do

For most retirees, Social Security Benefits will form the bedrock of their financial security going into retirement. For this reason, it’s well worth your time to consider the optimum Social Security claiming strategy. This should be done, regardless of your circumstances or your level of optimism or pessimism that lawmakers will take responsible action and be able to prevent this prophesized benefit reduction.

Social Security won’t keep you completely covered in retirement, though, regardless of what you do. Basically, it only accounts for around 40% of the income you’ll need to get by in retirement. And statistics show that, in retirement, you’ll need an income source providing 70% – 80% of what your income was while working. However, fortunately, there are other sources of income you can use to help yourself.

So, do you have enough to retire?  If you’re worried about if you’ll have enough and would like to learn more, contact us. We’re always here to help.

Sources: Forbes, CBS

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