If you are a millennial or a member of GenX who has just started saving up for retirement, you may be able to increase your efforts now. It revealed a recent report Social benefits can be reduced already in 2034 due to lack of funding.
The 2021 Social Security Trustees report revealed that as of 2034, retirees will only receive 78% of the full benefit they expected if Congress does not find a way to solve the funding problems.
But what’s wrong with the Social Security program that needs to be corrected? And how can Congress take steps to rectify that?
This is how social security works
To understand how and why social security is broken – or at least cracks under pressure – it is important to understand how the program works. Employers and employees share a payroll tax of 12.4% on the employee’s first $ 147,000 in income. The self-employed pay the full 12.4 per cent.
For every dollar paid for social security, 85 cents go to a trust fund that pays monthly benefits to current retirees and their families, while the other 15 cents go to a separate trust that pays benefits to people with disabilities and their families, according to CNBC.
“You want the relationship between workers and beneficiaries at a kind of healthy level where you do not have too few [working] people who pay for too many recipients, Kathleen Romig, a senior political analyst at the Center for Budget and Political Priorities, told CNBC.
But due to a drop in the birth rate after the baby boom, there are fewer people paying into the program. At the same time, longer average lifespans and an increasing number of retired baby boomers have created more beneficiaries. By 2034, reports say, the Social Security Administration will have exhausted excess reserves, meaning reduced benefits for retirees by that time.
Social Security is a bipartisan program supported by 90% of all Democrats, Republicans and Independents based on a recent AARP survey, CNBC reported. It is an essential program to support older Americans in their retirement. And while it was conceived to supplement other retirement income, the Center for Budget and Policy Priorities reports that half of seniors receive 50% or more of their retirement income from the program.
Steps Congress can take
Congress has a few options to solve the problem by 2034. It could reduce benefits, increase the retirement age or increase social security taxes. It’s an ancient budget problem. To eliminate a deficit, find ways to spend less or earn more.
Congress was able to avert this very problem in 1983 by raising the full retirement age from 65 to 67 while taxing social security benefits as income.
The Social Security 2100 Act, introduced by Democrats in the House of Representatives, could have a similar result. The plan proposes to apply payroll taxes to individuals earning more than $ 400,000, adjust the cost-of-living index, and increase the benefits for low-income workers. Taxing higher-income Americans would offset the benefit increase for lower-income retirees.
The legislation would require bipartisan support and, according to experts, a sense of urgency. But “there is no incentive from the people in Congress to address this issue until it is imminent,” Alicia H. Munnell, director of the Center for Retirement Research at Boston College, told CNBC.
What you can do to prepare yourself
Congress stepped in just in time back in 1983 to solve the social security problem. But U.S. taxpayers today may not want to take that chance again. Set a goal to set aside retirement income through investments based on your age and risk tolerance. Studies by Chase Bank and other financial experts recommend that you plan to replace 80% to 90% of your earned income in retirement, although this amount may be smaller if you retire without debt and without mortgage repayments. On average, 40% of retirement income comes from social security benefits, according to the Social Security Administration, but you may want to plan a worst-case scenario and look to set aside more money.
Talk to a financial advisor to help you evaluate your budget and determine the best course of action to kick-start your retirement savings. You want peace of mind knowing that your future will not be determined by government action – or passivity. And if Congress fixes the riddle of social security before 2034, you may have extra savings to live up to in your later years.
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This article was originally published on GOBankingRates.com: Social security: Your benefits may be reduced in 2034