The Future of Social Security Retirement Benefits
Resolving Social Security’s challenges garners attention in Washington, but will the latest proposals meet the same fate as past attempts?
One of the most frequent inquiries from clients regarding Social Security is: “Will it still be available when I retire?”
The answer is yes. By law, Social Security must provide benefits to eligible Americans. However, the unknown is what changes lie ahead to ensure its continuation. Modifications are necessary for the system to maintain benefit payouts.
The “You Earned It, You Keep It Act”: Eliminating Taxes?
Each year, lawmakers put forth new ideas, the latest being the “You Earned It, You Keep It Act” proposed by Democratic Representative Angie Craig of Minnesota. This legislation would eliminate federal taxes on Social Security benefits.
Many are surprised to learn that Social Security payouts are partially taxed by the federal government. This wasn’t always the case. From the 1930s until 1984, these benefits were exempt from federal income tax until a law changed in 1983.
Eliminating taxes on Social Security income is not a radical concept. It would undoubtedly allow seniors to retain more retirement income. To offset lost tax revenue, Craig’s bill proposes gradually eliminating the cap on employment income subject to Social Security tax. Currently, only the first $168,000 of a worker’s annual earnings are taxed, an amount adjusted for inflation yearly.
Most Don’t Understand Solvency Issues
Another question was “Under current law, Social Security benefits could be reduced by 20% or more for everyone by 2035.” This is true, but only 58% got this vital question right.
The Looming Social Security Reserve Depletion and Benefit Cuts
Per current projections, the Social Security Administration will deplete its reserves within a decade, necessitating a 20% reduction in benefits under existing laws. Congresswoman Craig asserts her bill would extend solvency projections to 2054, adding 20 years of financial stability to the program.
Potential Long-Term Remedies
While this bill is a step in the right direction, it does not represent a permanent solution.
When Social Security was established in the 1930s, the promise was retirement benefits for workers upon reaching age 65, when the average life expectancy was 62.
Today, life expectancy far surpasses retirement age, and the program now covers spouses, divorced spouses, and children.
A more lasting solution requires pulling multiple levers beyond this bill’s scope. Options under consideration include raising Social Security tax rates, increasing the retirement age for eligibility, and/or implementing means testing, whereby high net worth individuals may not receive full benefits or any benefits at all.
Taking Charge: Retirement Planning Beyond Social Security Alone
The bottom line: Social Security will exist in some form, and lawmakers will likely enact necessary changes to sustain it at full capacity eventually.
Individually, we must take control of factors within our grasp. While Social Security is a vital foundational income source for retirement planning, it should never be the sole source. Saving for retirement and developing a strategy to generate income from those savings enables you to take charge.
All information contained in this blog is for general information only and shouldn’t be considered investment advice.
