Opinion: What does social security insolvency mean and how can it affect your retirement?
Opinion: What does social security insolvency mean and how can it affect your retirement?

Opinion: What does social security insolvency mean and how can it affect your retirement?

In the last many months, you may have seen news headlines announcing that the Social Security program will be insolvent by 2033. This may be alarming if you are planning to retire, but it does not have to be. While news of social security’s potential lack of funding is a real concern, it’s important to remember that “insolvent” is not the same as “bankruptcy.” In this case, it means that there is not enough money to meet all the obligations of the program. If nothing is done to fund the system at the current level, it is estimated that the program will only be able to pay 76% of what is due to pensioners from 2034 onwards.

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How did we get here? This news has been a long time coming and not a surprise to those who understand how the system works. It’s simply about demographics. The social security system relies on the payroll taxes of those who work today to pay for the benefits of those who retire tomorrow. But as the baby boomer generation continues to retire and leave the workforce in large numbers, the need for benefits outweighs the amount contributed. The COVID-19 pandemic, which increased the number of unemployed workers, also affected the insolvency date and pushed it up by a year. While the issue of social security insolvency will be a major political issue, probably one that will require action from Congress, there are things that people preparing for retirement should know in order to better plan for the future.

Potential changes in the Social Security program

As Congress considers how to continue to fund social security, there are potential changes in the program that may affect when and how you receive benefits. A few that could be implemented include:

  • An increase in the payroll tax. The payroll tax is currently funded by Social Security, so since more money is needed for the program, a tax increase is possible.

  • An increase in the earnings limit for payroll taxation. Currently, the maximum income that can be taxed for social security is $ 142,800. Raising this ceiling would generate more revenue for the system.

  • Raising the retirement age for benefits. For those born in 1960 or later, the minimum retirement age is 62 and the full retirement age is 67. An increase in these ages would delay the payment of benefits and also keep many workers who contribute to the system longer.

  • Means tested benefit payments. The most controversial opportunities would create a sliding scale of benefits, with people earning more while working receiving less from social security when they retire.

How to adjust your pension plans

Even when fully funded, social security benefits are only part of a pensioner’s monthly income. Which, while important, means that most of us will have to plan for other sources of income. For anyone retiring before 2033, it is unlikely that benefits will change. For those who are retiring after, there are things that can be done now to ensure that you have the necessary money to live the life you want.

The first step in planning a change in social security benefits is to understand what these potential benefits could be. By visiting SSA.gov and by creating an account you can determine what your benefit payments will be at your minimum, full and maximum retirement age at current program levels. Understanding how much you can receive will help guide how much you may need to save through other avenues.

Second, take a serious assessment of your current expenses and assess how they will be handled upon retirement. Will some expenses, such as health care expenses, increase? Will others, like housing costs, fall? Assess what your current lifestyle is and how you will spend your retirement years so you can compare your potential costs with what you have saved up.

Finally, meet a professional retirement planner. They can help you estimate your likely monthly retirement expenses and determine how much of a gap there may be between your estimated benefits and expenses. They can also help you evaluate your current retirement strategy and provide income projections to your current retirement accounts. All of this data can help you determine if you can benefit from a fixed annuity or other financial planning option.

Although 2033 is not that far away, you have some time to plan ahead. Online resources and financial professionals can be of help. Take advantage and convert confusion into confidence when it comes to your retirement.

Paul Garafoli is the regional sales director for individual annuities at The Standard, which offers insurance products, including pension schemes and annuities.

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