Social Security About to Payout More than it Takes in
By 2020, Social Security payout more than it takes in, according to a recent report from the trustees that oversee the program.
For the first year since 1982, Social Security won’t get enough money from payroll taxes and other sources to cover the hundreds of billions of dollars it pays to retired and disabled people.
That means it will need to use surplus money in its trust fund to make sure beneficiaries get paid. The trend will continue until Social Security’s main trust fund runs out in 2034.
Unless Congress does something to fix the problem, payments to retired beneficiaries will be cut by 23 percent starting in 2035.
The possibility of reduced benefits is a big wake-up call to anyone who is counting on Social Security to fund their retirement.
How We Got to Social Security Payout being More Than What it Takes in
Social Security payments to retirees come from a trust fund called the Old-Age and Survivors Insurance Fund. Social Security has another trust fund, the Disability Insurance Fund, that pays benefits to disabled people.
Both funds get most of their money from payroll taxes by working people.
The payroll tax withholdings are paying current beneficiaries, the money isn’t for your retirement.
That means people who are currently working are paying for Social Security for people who are now in retirement.
But as the huge Baby Boomer generation hits retirement age and people in general live longer, Social Security is paying out more in benefits. This isn’t the first time the Social Security program has faced a deficit.
The last time was in 1982, and Congress increased payroll taxes slightly to put the program back on track and generate a surplus every year.
The fact that the program will spend more than it takes in for 2020 won’t affect people’s day-to-day lives; the program still has plenty of surpluses to keep paying benefits at their current levels. But it’s a warning sign that things could look very different for upcoming generations of retirees.
The Impact of Social Security’s Financial Situation
Most people don’t think Congress will allow Social Security benefits to be cut by 20 percent in 2035. Congress may pass legislation that would preserve everyone’s benefits at their current levels, or it could phase in cuts, similar to the way that the eligibility age for Medicare has been gradually going up.
But, as with almost everything else, Democrats and Republicans do not agree on how to approach the problem. In fact, we’ve known about the Social Security funding issue since 1993, but nothing has been done about it.
So how can you prepare without knowing what will happen to Social Security in the long term? The answer is to not expect Social Security to be the full source of your retirement income. When Social Security was created, it was meant to keep older people out of poverty. Today, many people think of Social Security as a replacement for a paycheck.
For most people, it doesn’t work out that way. Their monthly Social Security benefit is far less than they were earning while working. If Social Security is your only source of money, you may end up barely above the poverty level.
Preparing for Retirement
If you are in the pre-retirement years, save as much money as you can—it’s never too late to start. Also, look for ways to cut expenses. Downsize to a smaller home, pay off debt, and reduce your overall lifestyle so you can live on less.
Social Security payout is more than it takes in, meeting with a financial advisor can help you understand the amount of money to have in retirement.
One thing to consider is the cost of healthcare as you get older. Medicare is not free—most beneficiaries pay monthly premiums, and they may also pay copays and deductibles. Vision, hearing and dental care won’t have coverage through Medicare.
Those are just the current costs. Medicare is projected to drain its hospital insurance fund by 2026, according to the trustees’ report. That’s three years earlier than expected. So there could be future changes in store for the Medicare program as well.
Planning for the future is hard when you don’t know what’s going to happen with Social Security and Medicare. But by being proactive and putting yourself in the best financial position possible, you’ll be ready for the future.