Many seniors and soon-to-be seniors have invested in Social Security for their entire working lives a program designed to help with the costs of retirement living. Many families already benefit from Social Security—about one family in four, according to the National Academy of Social Insurance (NASI).
Social Security works fairly simply: working Americans pay a tax, which funds benefits for those who are already disabled or retired, or for the family of a deceased person. Unlike pensions, Social Security is not privately funded. It is also not intended to be the sole income given to its beneficiaries, as the total is typically less than $2000 per month.
Concerns about Social Security and its viability have arisen, especially as the baby boomer generation begins to need its benefits. Considering how large this group of people is, and the lower amount of young people who will be funding Social Security, many have been questioning whether Social Security will be able to continue.
Especially given recent threats of government shutdowns, there is a rising fear that Social Security and Medicare, which largely go to the elderly, will experience budget cuts and thus payouts will be delayed or curtailed. Not every budget deal that comes through Congress is a reduction, however. According to Adam Bergman, writing in Forbes, the budget deal made on October 26, 2015 attempted to provide some temporary fixes to the Medicare and Social Security Disability Insurance programs. This would have the effect of keeping the disability program in the black until 2022. According to Wharton University, the deal also prevented Medicare premiums from rising sharply in 2016 for many who are covered under Medicare Part B.
The next few decades are the real problem.
The next few decades are the real problem. The American population is aging, and younger people are having fewer children. 75 million baby boomers will be retiring soon, and current workers are not projected to be able to generate enough taxable income to keep Social Security solvent. In other words, the money has to come from somewhere, or a reduction in benefits (potentially leading to an all-over shutdown of the program) may commence. This is projected to occur, according to Forbes, between 2025 and 2035. By 2089, economist Laurence Kotlikoff, quoted in the Wharton University article, projects that Social Security will be underfunded by $25.8 trillion.
There are some solutions being proposed. Some say a higher income tax would gather enough money to maintain the solvency of Social Security programs (it would need to be about a 32% increase, according to Kotlikoff). Others advocate cutting benefits. Still others advocate for the government to find a way to fund it some other way, diverting funds from other programs rather than cutting benefits or raising taxes. No one solution seems to be taking the lead, however, and the problem is drawing nearer each day.
Answering the Big Question
Without a complete overhaul in tax policy and government spending, it looks like the program may well run out of cash in the coming years. If that is the case, what should Americans do to plan for retirement?
Social Security is not the only way to pay for retirement living. There are encore careers—specific careers begun at retirement age, which may pay less or accommodate the disabilities that may come with age but still offer an opportunity to earn an income. These are growing in popularity as the abilities of the healthcare industry to expand the life span increase. This means collecting benefits later and allowing more money to stay in the funds for longer, which would help keep Social Security solvent. There are also private retirement funds, offered by many jobs and available to anyone with money. Taking control of your own retirement plan and not relying on government programs is the best way to avoid the consequences of a Social Security shutdown.
The problem comes down to those who worked at jobs for their entire lives and yet were unable to save private funds for retirement. They are the ones Social Security is most designed to help, since they cannot afford retirement on their own but may need to if no solution is found to the funding crisis that faces Social Security.
Bergman, Adam. (October 29, 2015). Budget Deal Underscores Danger of Relying on Social Security for Retirement Income. Forbes.com. Available at http://www.forbes.com/sites/greatspeculations/2015/10/29/budget-deal-underscores-danger-of-relying-on-social-security-for-retirement-income/#d150f042ab571b626f312ab5. Retrieved 1/21/2016.
Knowledge@Wharton. (October 23, 2015). What the Social Security Squeeze Means for Retirees. Wharton Business School. Public Policy. Available at http://knowledge.wharton.upenn.edu/article/what-the-social-security-squeeze-means-for-retirees/. Retrieved 1/21/2016.
National Academy of Social Insurance. What is Social Security? Available at https://www.nasi.org/learn/socialsecurity/overview. Retrieved 1/21/2016.