Social Security’s future is still unknown, which makes people wonder, “Will Social Security run out?”
A report from the board of trustees for the Federal Old-Age and Survivors Insurance Trust Fund and the Federal Disability Insurance Trust Fund says that Social Security’s income will be more than its expenses this year.
The report says that by 2035, all of the reserves will be used up, and taxes will only cover about three-quarters of the benefits each year after that point.
For the reason that Social Security is in trouble.
Having longer life expectancies, fewer people in their 20s and 30s, and more retirees are all part of the problem. By 2035, there will be more than 78 million people over 65 in the United States, up from about 56 million now.
So, more people will be taking money out of the Social Security system than paying into it, which means that there will be less money for the system.
That doesn’t mean the program will run out of money all at once, however. Payroll taxes are supposed to cover about 76% of the benefits that are supposed to be paid out.
It could also mean that retirees could get less Social Security money or that workers would have to pay more into the system. This is what Social Security could look like in the future if no changes are made.
It could happen that benefits could be cut.
If you plan to use the program in 2035, keep in mind that you might not get as much money as you thought you would. A trust fund shortfall means that benefits will have to be cut by 23% if no changes are made to deal with it, according to the trust funds’ board of trustees’ 2020 report.
It would be hard for many retired people to make ends meet if their benefits were cut by that much. Among married couples, 50 percent get at least half of their income from Social Security, and 70 percent get at least half of it for people who are single.
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If benefits are cut, how likely is it that they will?
Some experts aren’t sure that Social Security benefits will be cut very much in the near term.
A Social Security expert and retirement planner at Retirement Capital Planners says that “the impact on everyone in the country would be far worse than anyone could have ever dreamed.” “You’ve got a huge problem on your hands,” says the person.
That’s why he thinks Congress will step in before 2035 to keep benefits from being cut so much, and he thinks they will. As a Social Security expert, Mary Beth Franklin agrees that a big cut in benefits isn’t likely.
“Social Security is taking over as a source of income for people who can no longer work.” Because the program is so popular, politicians won’t want to change benefits for retirees who already have them. They’ll likely have to come up with other ways to deal with the trust fund shortfall.
Ways to Make Social Security’s Budget Work
If Social Security runs out of money in the next 15 years, there have already been a lot of ideas for how to deal with the money problem. Among these choices:
- People are raising the payroll tax rate.
- Increasing the amount of money that goes into Social Security taxes
- Giving people a little more time before they can retire.
- Reducing the annual cost-of-living changes
- Cutting the benefits
There is a good chance that if benefits aren’t cut, tax revenue for the program will have to go up. One way to do that would be to raise the payroll tax rate, which would help.
Taxes on wages are paid by workers and employers to fund Social Security. The workers pay 6.2% of their wages, and the employers pay 6.2%, too (self-employed people have to pay the full 12.4 percent ).
Then, what would happen?
If the trust fund’s funds run out, the payroll tax would have to go up 3.14 percentage points to raise enough money to keep the program going, according to a 2020 annual report from the board of trustees.
If nothing is done until 2035, the rate of growth would have to be 4.13 percent or 4.13 percent.
Roseman, on the other hand, doesn’t think Congress will raise the payroll tax to make more money for the trust fund. “I think there’s less of a desire for that than anything else you can look at.” “There’s going to be a tax rise.”
In 2035, Social Security would look very different if this change was made.
When the payroll tax rate goes up, it could come in different ways. The total payroll tax is split evenly between the employee and the employer right now.
Employers and employees could split the 3.14 percent tax hike evenly, or the tax hike could be hidden from taxpayers by giving the tax hike to the employers more.
The Social Security 2100 Act is a legislative proposal from Rep. John Larson (D-Conn.). Larson wants to make sure everyone gets the same amount. It would make the Social Security tax rate for both the employer and the employee go up to 7.4%.
The bill has some support, but so far it hasn’t been able to get through Congress.
Wages could be taxed more.
Another way to raise taxes to pay for Social Security is to raise the amount of income that is taxed. Only wages up to the Social Security contribution and benefit base are taxed by Social Security.
The rest of your wages are not taxed. In 2019, this amount was $132,900, but in 2020, it will be $137,700. This is because this amount is based on how much the cost of living goes up.
Then, what would happen?
In order to keep the trust fund solvent, the taxable wage limit would have to be even higher or completely removed, Franklin said. This would make all income subject to the payroll tax, so the trust fund would be able to last for many years.
People who make more than $137,700 a year now don’t have to pay Social Security taxes on their money.
Social Security in 2035: What it would look like then. It’s going to be different after this change.
When the taxable wage limit is raised, it will only affect people who make more than the current contribution and benefit base.
For example, if you make $80,000 a year, you pay Social Security taxes on all of your income, even if the limit is $130,000, $300,000, or no limit at all. This doesn’t change your payroll taxes.
That’s not the case if you make $250,000 in 2020 as a W-2 employee. You only pay Social Security taxes on the first $137,700, which comes to $8,537.10.
Social Security taxes would be paid on all of your $250,000 income if the limit went up to $300,000. You would pay $15,500 in taxes on that amount.
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The Full Retirement Age could go up.
The full retirement age for Social Security benefits is likely to be raised because tax increases aren’t very popular, Roseman told the Daily News. Because of this, younger generations will have to work longer before they can get benefits, which is bad for them.
If you were born in 1937 or earlier, you can now get full retirement benefits at 65. If you were born in 1960 or later, you can get full benefits at 67.
Then, what would happen?
Both Roseman and Franklin said that there are plans to raise the full retirement age to 69 overtime. This would keep more money in the trust funds.
While this might make it harder for retirees to get the most out of their Social Security, it could also make it less common for people to do this. Roseman said that if you wait to get your retirement benefits until you’re older than your full retirement age, your benefits go up each year until you’re 70.
In 2035, Social Security would look very different if this change was made.
As life expectancy rises, it might make sense to raise the retirement age because people have more time to work. However, raising the retirement age cuts benefits because it takes longer for people to get their benefits.
In addition, many low-income workers haven’t been able to benefit from the overall increases in life expectancy. This is because they have shorter life expectancies than rich people. Increases in the retirement age could hurt people who make very little money.
The Social Security COLA could be cut back.
Retirees who get Social Security benefits usually see their checks rise a little each year to keep up with rising prices. Consumer prices are used to figure out these cost-of-living changes, or COLAs.
This is what happened after there was no cost-of-living adjustment in 2015. After that, the last few years saw increases of 0.3%, 2.8%, 2.8%, 2.8%, and 1.6%. In 2020, there will be a 1.6% rise.
Then, what would happen?
Roseman said there could be changes to cost-of-living adjustments in order to keep Social Security’s trust funds from going broke.
There’s a good chance that the formula would stay the same for people who were born before 1960. It might be that people born after 1960 will have a lower COLA, though, he said
There might be a time when benefit checks don’t keep up with inflation. People who rely on Social Security might have to find ways to cut back on their spending to make ends meet, but they might not have to.
In 2035, Social Security would look very different if this change was made.
It has been shown that Social Security benefits may not be adjusted for inflation at all in the past few years, or they may be very small or not at all.
This might make it very hard for people on fixed incomes to pay their bills if the cost of housing and rent is going up each year. Plus, older people spend more on healthcare costs than younger people, which tend to rise faster than the cost of inflation, which is why they spend more than younger people.
It’s possible to cut back on the benefits you get
People who get Social Security benefits could have their benefits cut by 19 percent or 23 percent, according to a report from the board of trustees in 2020. This would solve the shortfall in funds. If nothing is done until 2035, then all benefits would have to be cut by 25% if they aren’t.
Then, what would happen?
If Social Security’s funds run out in 2035, benefits could be cut in a number of ways. The easiest way to cut would be to make the same cut on each side of the board. Another way to cut benefits would be to do so based on income.
For example, the top 25% or the top 50% of earners might see their benefits cut, but benefits for lower-income Social Security recipients would stay the same.
In the same way that Social Security could become a means-tested benefit, it could also be based in part on the recipient’s income or other assets. If you paid into the Social Security system, you’ll get benefits even if you make a lot of money or have a lot of money.
In 2035, Social Security would look very different if this change was made.
It will cost $1,503 a month to retire in 2020. A 20% cut in benefits would mean that average benefits would drop by about $301 a month, or $3612.
This would mean that the average benefit would drop by $3,612 per year. It would cost $346 less a month if benefits dropped by 23%. That would cost $4,152 less a year.
The answer to this question is no.
As Roseman sees it, the Social Security shortfall problem is simple to solve, but it’s not easy to get Congress to make the changes that will solve the problem for everyone. “Nobody wants to make a deal,” he said.
Roseman, on the other hand, doesn’t think Social Security will run out of money. It should be a source of retirement income for his clients, but it should not be their only source. To live on Social Security alone, he said, “I would never tell anyone to do that.”