With Social Security Expected to be Significantly Underfunded by 2030, What are Your Options?

Social Security is in trouble. The current pay-as-you-go funding mechanism designed in 1935, in which current workers fund benefits for current retirees - was never designed to withstand an immense demographic 'Baby Boom,' followed by a baby bust. But that's exactly what happened in the years after World War II, and the Social Security trust fund is coming under increasing actuarial strain.

It's not just the sheer numbers of Baby Boomers now beginning to enter into their retirement years. Retirees are now living much longer into retirement than prior generations, and therefore collecting their benefits for many more years than expected. When the Social Security funding mechanism was designed, it was common for Americans to retire at age 65 and just live a few years into retirement dying between ages 72 and 76.

However, many of today's retirees are living twenty and even thirty years into retirement, drawing down the Social Security trust fund.

What's more, the expanding numbers of retirees drawing Social Security benefits are now depending on the efforts of comparatively fewer and fewer younger workers to fund them from their payroll taxes. A few decades ago, for every retiree drawing Social Security benefits, there were 15 workers paying into the system to support them. But as of 2020, the Social Security Administration projects that the ratio of workers to retirees will decline to as low as three to one.

Meanwhile, the Social Security Administration is running an operating deficit. It's paying out more than it's taking in from payroll taxes. This deficit forces it to sell off its portfolio of treasury bonds to raise the cash to pay benefits - and reducing its interest income from those bonds. By 2030, the Social Security Administration expects that its portfolio of bonds will be exhausted, and it will only have enough revenue coming in from payroll taxes to support 76 percent of current benefit levels.

Congress must find some way to close the gap.

Among their options:

• Increase the payroll tax from 12.4 percent to 14.4 percent. This would severely burden younger workers. But the longer we go without acting, the higher the payroll tax necessary to close the gap will become.
• Increase the retirement age
• Decrease or cap benefits
• Privatize some or all of Social Security with the expectation of getting higher returns on investment.
• Lift the earnings cap, requiring wealthier individuals to contribute more to the system, though without paying them commensurately higher benefits in return. Currently, those with incomes over $118,500 do not pay payroll or self-employment tax on amounts over that figure.
• Cut cost-of-living adjustments - essentially the same as cutting benefits.
• Means-test Social Security, restricting benefits for more affluent beneficiaries.
• Some combination of any or all the above measures.

The worst-case scenario, at this point, is that Social Security benefits will decline to about 76 percent of current levels. This assumes that Congress does nothing. No one is projecting that they will go away entirely. However, if they means-test Social Security benefits, then wealthier Americans could see bigger cuts to benefits. Those currently in their 50s and 60s, however, are expected to receive their full benefits. The costs will have to be borne by younger workers in their 20s, 30s and 40s.

What Can You Do?

Social Security is not normally a variable source of income. The best way to deal with a loss of Social Security benefits is to ensure you replace this guaranteed source of income with another. Consider a well-funded employer pension, or annuities that guarantee a specific level of payout. While mutual funds generally offer the potential for greater growth over time, they cannot offer guarantees about your income. Annuities, on the other hand, can do precisely this - subject to the claims-paying ability of the insurance carrier that issues the annuity contract.

So, consider supplementing your income with guaranteed payments from one or more annuities.

You can also reduce your monthly expenses, cut debts, and contribute as much as possible to tax-advantaged retirement savings vehicles such as 401(k)s, SEPs, SIMPLES, 403(b)s and IRAs.

You can also turn your life insurance policy into a savings vehicle, as well, by implementing a supplemental life insurance income program.

For more information, feel free to Contact Neptune Financial to schedule an appointment.

Basic Understanding

This blog is being provided for informational or educational purposes only. It does not take into an investment objectives or financial situation of any individual, family, prospect, client, or prospective clients. The information is not written or intended as investment advice and is not a recommendation about managing or investing your retirement savings.

An individual seeking information regarding their investment or retirement needs should contact a financial professional.

Neptune Financial, and their financial professionals do not render tax and legal advice. Please consult your tax and legal advisors regarding your personal tax or legal concerns.