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October 14, 2013 at 08:10 PM
From middle-aged wage earners to current retirees, just about everyone is eager to know what they can expect of Social Security in the coming years. People are living longer lives and requiring longer-term sources of income, yet rising health care costs, government deficits and a still-shaky economy could jeopardize their retirement prospects.
Despite the consistent media attention over benefits reductions and opt-out programs, however, it looks like Social Security is here to stay for a while. Still, experts agree that it will have to undergo a few changes in order to remain viable. The following are a few of the recent roadblocks and proposals that will affect retirement planning over the next few decades.
Exhausting Funds
While opinions on proposed changes vary wildly, most advisors agree that Social Security is in financial trouble. “Eventually Social Security is going to run out of money,” said Anthony Saccaro, president of Providence Financial and Insurance Services. Government estimates suggest the SS trust fund will be exhausted by 2033, a troubling figure for soon-to-be retirees.
The situation isn’t as dire as it may seem, however. “When people hear the word ‘exhausted,’ they think ‘zero,’ but the FICA [Federal Insurance Contributions] tax will still cover 77% of benefits,” said Seth Stewart, president and co-founder of PlanMyBenefit. Trust fund depletion within 20 years is a worst-case scenario, and Congress is looking at a number of proposals which would curb or eliminate that 23 percent deficit.
Reductions in Benefits
Those proposals aside, people planning for retirement, particularly those in their 40s and younger, may not be able to count on their currently-projected benefits. “Long-term planning is to prepare our younger clients for the shortfall, which certainly will affect people who are in their 20s, 30s and 40s right now,” said Saccaro. While Congressional action may prevent the potential 23 percent benefits reduction for current retirees, future actuarial imbalances will most likely lead to losses for Gen Xers and Millienials.
The minimum age for full benefits collection is currently 67 for people born after 1960. This will likely rise, as well. “It will probably creep up to 70 over time,” said Laura Stover, President of Laura H. Stover Financial Group. After all, the retirement age was 65 at the program’s 1935 inception, a time when average life expectancy was only 62. “Social Security was never intended to be the primary source of income for any retiree, yet it’s the cornerstone of retirement accounts for about 60 percent of its recipients,” she said.
Ultimately, whatever reductions do occur will have to take place gradually. “If there’s a 25 percent cut across the board in 2033, there will be an uproar in this country,” said Saccaro. Using a 2033 retiree entitled to maximum benefits as an example, he notes that such a person would have to save an additional $10,266 per year, starting now, in order to offset such a dramatic reduction. Of course, that would only happen in the unlikely event that Congress doesn’t raise taxes, alter cost of living adjustments or update the consumer price index (CPI).
Proposed Tax Increases
A tax increase in one form or another will likely be necessary to preserve benefits, and the FICA tax seems the most plausible place to start. “The FICA tax is the lowest hanging fruit,” said Stewart. “The threshold affects only 6 percent of wage earners, and it would only take minimal changes to make the system solvent.”
One of the most popular proposals would gradually raise total employer-employee contributions from 12.4 percent to 15 percent, likely at a quarter of a percent per year. Alternatively or simultaneously, Congress could increase the limit on taxable earnings, which was already bumped from $110,000 to $113,700 in January.
