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Workers have contributed to Social Security since it began in 1937, and retirees have been collecting benefits since the same year. However, we are increasingly hearing questions from clients, especially younger clients, about whether they will receive the benefits promised.
background
Essentially, Social Security is a forced savings program designed to protect people from unexpected hardships. Although the precise provisions covered have evolved over time, the core mission remains the same. The program collects mandatory taxes from workers and their employers throughout their careers and pays benefits to retirees to help them balance their lives. Importantly, taxes collected are not set aside for later use. Instead, it will be used to pay current retirees.
problem
Most people have probably seen the math. If no changes are made, Social Security funding will “deplete” around 2035. There are two main reasons for this. One is the aging of the population and its longevity. The full Social Security retirement age has been extended from 65 to 67, but it has barely kept pace with longer lifespans.
At the same time, the overall population is aging. In 1945, for every Social Security recipient, nearly 42 workers paid into the program. By last year, this ratio had fallen to 2.7 workers per beneficiary. This ratio is expected to continue to decline, eventually reaching a 1:1 ratio.
solution
Quite simply, the system needs higher taxes, lower benefits, or a combination of the two to remain solvent. Unfortunately, this issue continues to be put on the back burner. Politicians see only the downside to attempts to tackle this problem, so few are willing to do so.
Back to the original question: Will it be around the time I retire?
Yes, you will be covered by Social Security when you retire, regardless of your current age. If nothing is done to fix the system, benefits will automatically be cut by about 20% in or around 2035. As that deadline approaches, some legislative action may be taken, but I’m not holding my breath. The further away you are from retirement, the less you may want to rely on current projections. Change will come sooner or later.
What should workers do?
Whatever changes come to the Social Security program are far beyond most of us’ control. But what we can do is focus on what we can control.
Protect your future by contributing to your own retirement savings, such as a 401(k) plan, IRA, or Roth IRA. Supplements those who have non-retirement savings in brokerage accounts. Also, create a contingency plan with sufficient life insurance so that your surviving spouse can adequately support your family. In short, rely on yourself.
summary
Fears that Social Security will disappear completely are unfounded. But change is inevitable in programs that are on an unsustainable path. The big question is when this change will happen and how it will affect workers and retirees.
Workers who lack insight into these important outcomes should focus on what they can control by actively saving for retirement. Given the uncertainty, it is not advisable to rely heavily or solely on Social Security benefits to cover your retirement needs. Plan accordingly!
David Crossman, CFA, is a senior portfolio manager at Bedel Financial Consulting, Inc., an asset management firm in Indianapolis. For more information, please visit our website at www.bedelfinancial.com or email David at dcrossman@bedelfinancial.com.
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