If you are like the millions of Americans approaching retirement and navigating the social security system, you may be wondering:
- How much will my Social Security income benefit be?
- How do I maximize my benefits for my spouse and myself?
- When should I begin taking Social Security?
Over the years, the Social Security system has undergone periodic scares, which have created a variety of questions and concerns. This may have led you to consider the elephant in the room: Will Social Security remain financially sound enough to pay for the benefits that are owed to you?
To answer this question, let’s look back on how this program began. With this important context in mind, we can better grasp how it could move forward in the future.
How Social Security Started
Social Security was created in 1935 during Franklin D. Roosevelt’s first term, a time when the country was mired in an economic downturn. It was designed to provide income to older Americans who had little to no means of support. (1)
Since its creation, three basic developments have ultimately led to the financial challenges Social Security faces today.
- The number of workers paying into the system (which supports current benefit payments) has fallen from just over 8 workers for every retiree in 1955 to 3.3 in 2005. That ratio is expected to fall to 2.2 to 1 by 2037. (2,3)
- The program that began as a dedicated retirement benefit has grown to also include support for disabled workers and surviving family members. These added obligations were not always matched with the necessary payroll deduction levels to financially support the additional coverage.
- Retirees are living longer than they were when the program began. Advancements in medical technology and our understanding of healthy behaviors have led to a longer retirement span, potentially placing a greater strain on the program.
Beginning in 2010, tax and other non-interest income were no longer able to fully cover the cost of the program. According to the Social Security Trustees 2020 annual report, this pattern is expected to continue for the next 75 years. This report projects that the trust fund may be exhausted by 2035 if we proceed without making changes to the program. (4)
Where Social Security May Go in the Future
If changes are to be made, there are several ways to stabilize the Social Security system. These include, but are not limited to:
- Increase Payroll Taxes: An increase in payroll taxes, depending on the size, could add years of life to the Social Security trust fund.
- Raise the Retirement Age: This has been implemented in past reforms, and it would save money by paying benefits to future recipients at a later age.
- Tax Benefits of Higher Earners: By taxing Social Security income for retirees in higher tax brackets, the tax revenue could be used to lengthen the life of the trust fund.
- Modify Inflation Adjustments: Rather than raise benefits in line with the Consumer Price Index (CPI), policymakers might elect to tie future benefit increases to the “chained CPI.” This assumes that individuals move to cheaper alternatives in the face of rising costs. Using the “chained CPI” may make cost of living adjustments less expensive.
Social Security reform is expected to be difficult, as it may involve tough choices. The better you can understand how this program has evolved and where it may go in the future, the better prepared you can be for your own retirement.
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- Social Security Administration, 2022
- Social Security Administration, 2020
- Social Security Administration, 2022
- Social Security Administration, 2021
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