Social Security remains a cornerstone of American retirement planning, yet it’s often shrouded with concern and misinformation. As the dialogue about its future grows increasingly pessimistic, many people question its reliability and role in their retirement income plans. Understanding the current state of Social Security is crucial for making informed decisions about your financial future.

Perception vs. Reality:  The Role of the Trust Fund

Much of the anxiety around Social Security comes from media reports highlighting the shrinking trust fund. This often leads to the mistaken belief that the program is on the verge of collapse. But the real issue isn’t mismanagement—it's demographics. As baby boomers retire and people live longer, benefits are outpacing payroll tax revenues.

Historically, Social Security operated on a pay-as-you-go basis. Since 2010, however, benefits have exceeded payroll tax collections. To bridge the gap, the Social Security Administration (SSA) has been tapping into the trust fund, a practice that will continue until the fund is expected to run out by 2033[i]. While this sounds alarming, it doesn't mean Social Security will vanish.

Misunderstandings About Insolvency

A common misconception is that the depletion of the trust fund means Social Security will go bankrupt and cease to exist. In reality, even after the fund is exhausted, payroll tax revenues will still cover approximately 79% of retirement benefits[ii]. This isn’t a doomsday scenario; it’s a call for strategic policy adjustments.

Fixing the Funding Gap – Potential Reforms

The SSA has proposed several solutions to address Social Security’s funding gap. Here are some of the most viable strategies:

1. Increase Social Payroll Tax – Projections show Social Security's long-run deficit is 3.5% of covered payroll earnings[iii]. Raising payroll taxes by this amount—1.75 percentage points each for employees and employers—could secure full benefits through 2098, with a one-year reserve at the end.

2. Increase the Social Security Wage Base—In 2024, the first $168,000 of earned income is taxed at 6.2% each for employees and employers; self-employed individuals will pay 12.4%.[iv] Increasing the Social Security wage base can help address the shortfall.

3. Increase Full Retirement Age (FRA): Currently set at age 67 for individuals born in 1960 and beyond, the FRA dictates when retirees can claim full retirement benefits without reduction. Each one-year increase in the FRA equates to roughly a 7% cut in monthly benefits for affected retirees. Raising the FRA to 70 would reduce benefits by nearly 20% at any given claiming age.[v] This change aligns with historical precedent, as the FRA was originally 65 for most of Social Security’s history.  

4. Invest in Equities: The SSA could explore investment strategies to enhance returns, following successful models utilized by other countries like Canada or systems such as the US Railroad Retirement System.                    

These measures would require political compromise but could ensure the program’s sustainability and continued support for retirees.

Planning for a Reduced Benefit Scenario

Amid ongoing discussions about Social Security reforms, it’s essential to hope for the best but prepare for the worst—acknowledging the potential for reduced benefits if corrective actions fail to shore up funding. The looming risks of benefit cuts necessitate careful consideration alongside other retirement planning factors, including life expectancy, additional income streams, risk tolerance, inflation, and potential spousal benefits.

Consider your Options in an Ever-evolving Social Security Landscape

Despite the challenges and negative perceptions, Social Security is not on the brink of collapse. With informed decisions and potential policy adjustments, the program can continue to support retirees for many years. It's crucial to stay informed and consider the evolving landscape of Social Security in your retirement planning. We’re here to support you. Contact us to meet with an advisor and learn more about your options.

Sources

[i] Social Security Administration. (2024). The 2024 OASDI Trustees Report. https://www.ssa.gov/oact/tr/2024/

[ii] Munnell, Alicia H. 2024. "Social Security's Financial Outlook: The 2024 Update in Perspective" Issue in Brief 24-11. Chestnut Hill, MA: Center for Retirement Research at Boston College.

[iii] SSA, The 2024 OASDI trustees report. p.17.

[iv]Social Security Administration. (2024). Contribution and benefit base. https://www.ssa.gov/oact/cola/cbb.html

[v] Springstead, G. R. (2011). Distributional effects of accelerating and extending the increase in the full retirement age (Policy Brief No. 2011-01). Social Security Administration. https://www.ssa.gov/policy/docs/policybriefs/pb2011-01.html) 

---

---

Related Articles

Medicare is an important part of your retirement plan. We hope this overview is a helpful resource to know when to apply and how much it may cost.

Before you turn 65…

Most people turning age 65 should sign up for Medicare during their Initial Enrollment Period (IEP). During your IEP, which starts 3 months prior to the month you turn 65 and lasts until 3 months after, you can enroll in Medicare Part A (Hospital coverage), and Medicare Part B (Doctor visits). Medicare Part B pays 80% of most medically necessary healthcare services and the beneficiary pays the remaining 20%. You may also join a Medicare Part D plan (Prescription Drugs) within 3 months of when Medicare coverage begins to avoid any late enrollment penalties.

What if I’m still working past age 65?

If you are still working and have employer-based health insurance at a company with 20 employees or more, you can delay enrollment in Medicare until retirement. If, however, you work for a company with less than 20 employees, you will likely need to sign up for Medicare at age 65.

When your employment health plan coverage ends, you will need to add Part B within eight months of either a) the end of your employment or b) then end of your group health coverage. COBRA can help bridge the gap between employment coverage and Medicare. COBRA will end once Medicare begins.

If you are still working past age 65 and want to continue contributing to a Health Savings Account (HSA) with a high deductible plan, you will need to delay your Medicare Part A coverage.

What does Medicare cost?

Most beneficiaries will only pay the standard premium amount for Part B ($158.50 in 2022). They may be required to pay a premium based on their income represented in the chart below. Medicare uses the modified adjusted income from the beneficiary’s IRS tax return two years prior.

Typical cost for Part B is shown below with income ranges that increase Medicare premiums:

If you do not enroll in Medicare Part B when you are first eligible:

• Your Part B monthly premium will increase 10% for each 12-month period that you are not enrolled.

• You will pay a higher premium for the remainder of your life.

What if I need additional coverage?

Your IEP is also when you can buy Medicare Supplemental Insurance (also known as Medigap) from insurance companies. This is an additional policy that Medicare beneficiaries can purchase to cover the gaps in their Part A and Part B Medicare coverage. You are guaranteed the right to purchase this insurance without going through medical underwriting (i. e. you can’t be denied). This is critical if you have one or more chronic health conditions. Cost for Supplemental Insurance can typically range from $200 to $300 per month.

How do I sign up?

• Online (at Social Security) — It’s the easiest and fastest way to sign up and get any financial help you may need. (You’ll need to create your secure my Social Security account to sign up for Medicare or apply for benefits).

• Call Social Security at 1-800-772-1213. TTY users can call 1-800-325-0778.

• Contact your local Social Security Office.

Sources: medicare.gov

Medicare can be a complicated concept, but the help of a professional can make all the difference. Please reach out to our team if you could use some guidance as you approach retirement.

---

---

Related Articles

Over 50% of us take Social Security before “Full Retirement Age”… and over 90% take Social Security by “Full Retirement Age”.

What age are we taking Social Security?

Munnell, A and Chen, A, “Trends in Social Security Claiming”, May 2015, Center for Retirement Research at Boston College, from http://crr.bc.edu/briefs/trends-in-social-security-claiming/

What is “Full Retirement Age” and are 90% of people right?

Full Retirement Age or FRA is the age an individual can take their full Social Security retirement benefit without a deduction.  Depending on your age this is between 65 and 67.

While the FRA to take Social Security is between 65 and 67, we can take Social Security as early as 62 with a reduction in benefits.  48% of women and 42% of men take their benefit at age 62.  Is this a good idea?  If your FRA is 67, by taking your benefit at 62 there is about a 30% reduction in your benefit for your lifetime.  If you were normally to receive $2,000 a month, by taking it at 62 you would receive about $1,400 a month for life not including cost of living increases.  Over time, this is significant.

Consider these 4 reasons for delaying Social Security:

Higher Income

If you wait until 70, your monthly benefit is significantly higher. If your FRA benefit at 66 is $2,000, then waiting until 70 will provide a benefit of $2,640.  You will receive an additional $640 each month for the rest of your life plus the cost of living increases.  If the $2,000 covers basic expenses, the additional $640 per month of discretionary income can be significant to an enjoyable retirement.

Survivor Benefit

If you are married, this applies to you.  When one spouse passes away the survivor gets the higher of the two benefits and loses the lower benefit. Having the spouse with the highest Social Security benefit wait until 70 can drastically improve the life of the surviving partner.  If you both take Social Security at FRA with one at $2,000 and the other at $1,200, when one passes the remaining spouse will lose $1,200 a month and be left with only the $2,000 benefit.  Waiting until 70 for the spouse with the higher benefit of $2,640 may significantly improve the life of the remaining spouse.

Less Taxes

Social Security is not subject to tax the same way as your earned income. How much tax is paid on Social Security dollars depends on total combined income and differs from an individual to a married couple filing jointly. Whichever your situation may be, Social Security benefits are taxed either up to 50% or up to 85%. In any case, it is never taxed at 100% of the benefit. And waiting to receive your benefits until 70 may benefit the overall tax you pay. Always check with a CPA to confirm your specific numbers.

More Money

Most people will receive more Social Security dollars by waiting until 70 (If they live beyond 83.) Or if married and one of you live beyond 83, you will likely have more total dollars by waiting until 70. Additionally, if you live a long life, you will receive significantly more total dollars in retirement. This is due to the significantly higher Social Security benefit amount received by waiting, coupled with potentially lower income taxes.

Personally-saved retirement income is the base for many people’s retirement budget.  If portfolio assets run out or are greatly reduced, a higher Social Security benefit can drastically impact later years of retirement to fill the gap.

Higher income, survivor benefit, lower taxes, and more money… 4 good reasons to consider waiting past full retirement age to take your Social Security benefit.

Each person, each couple is unique

There is no one size fits all in retirement planning and the ramifications of the decisions made here are significant.  The questions you ask as you invest and then begin to plan towards retirement may be some of the most important, such as: what are you investing in and what are you taking your Social Security for? It's worth your time and finding trusted partners to help you navigate. At Human Investing these are the very questions we help people work through everyday for their "today's" and their "tomorrow's."

---

Related Articles