When looking at your retirement income, Social Security benefits might be part of your monthly lifeline — that is, if they’re still around and available. As of now, the program’s main trust fund is projected to be depleted by 2033. If that’s the case, a typical retired couple could face a loss of $17,400 in their annual benefits, according to an analysis by the Committee for a Responsible Federal Budget. For a single earner, the cut would be $13,100 each year.
Much discussion surrounds the future of the program, along with the ongoing financial needs of America’s aging workforce. For individuals and couples planning for retirement, it may become increasingly important to accumulate personal savings. Policymakers will need to address the program’s solvency and make decisions regarding benefit cuts.
[Related:What Will the Social Security COLA Raise Be for 2024?]
To gain a full picture of the Social Security program and its bankruptcy potential, the following can be considered:
— The history of the Social Security benefits program.
— How Social Security benefits might be reduced.
— The average benefits paycheck that retirees receive.
— How Americans should prepare for retirement.
— Steps to take to address Social Security’s bankruptcy risks.
The History of the Social Security Benefits Program
President Franklin D. Roosevelt signed the Social Security Act into law in 1935. The program started along with several others to target the welfare of Americans, with the goal of paying retired workers age 65 or older a steady income. Upon signing the act, Roosevelt stated, “We can never insure 100% of the population against 100% of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.”
In 1937, the first Federal Insurance Contributions Act, or FICA, taxes were collected. These revenues were placed into special trust funds, and benefits were paid out from these sources. Throughout the decades, more than $8.7 trillion has been placed into the funds, and over $7.4 billion has been distributed in benefits.
How Social Security Benefits Might Be Reduced
Given the current trajectory of taxes coming into the Social Security program and the amounts paid out, it is estimated that by 2033, there won’t be enough money left in the trust for every retiree. As such, a 23% cut could be made to all benefits. This would impact the 70 million Americans in retirement at that time.
The exact reduction of monthly income for individuals will vary, depending on the level of income earned during working years and the number of years they paid taxes into the program.
For a low-income household with two earning couples, the cut could be $10,600 each year. That amount is in current dollars and adjusted for inflation would come to $14,000 annually ($1,166 each month).
High-income couples with two jobs could see a reduction of $23,000 each year in today’s dollars. When inflation is factored in, the loss could be $18,500 annually or $1,541 a month.
[Read: The Future of Social Security.]
The Average Benefits Paycheck Retirees Receive
In 2023, the monthly average Social Security benefit was $1,701.62 in June.
Thinking about this amount and the pending changes, if a 23% reduction were made today, the amount would drop to $1,310.25. A person facing this type of loss might have to make living adjustments, such as moving to a smaller place or foregoing planned trips.
In recent years, the amount that retirees receive has changed in subtle ways. “Congress has effectively reduced benefits over the years,” says Paul Tyler, a retirement expert and chief marketing officer at Nassau Financial Group in New York City. “For instance, the full retirement age has shifted from 65 to 67, and Social Security became taxable in 1984.”
How Americans Should Prepare for Retirement
One approach to take to account for the uncertainty of the Social Security program is to focus on personal savings strategies. This might include contributing to a 401(k) or individual retirement account or making other investments. “The more money you save, the less you will need to rely on Social Security,” says Andrew Lokenauth, a retirement specialist in Tampa, Florida. “Make sure your investments are diversified and that they have the potential to grow over time.”
Delaying retirement or taking on extra jobs could be other ways to support your lifestyle. “Consider working part-time in retirement,” Lokenauth says. “This will help you supplement your income and stay active.”
Perhaps the optimal retirement plan looks at contingencies including emergencies and benefit adjustments. “The best strategy is to assume that Social Security will be around for a long time but still hedge the bet by creating income from other sources,” Tyler says. “This can include annuities that frequently offer guaranteed income payments for life.”
[READ: What Is a Social Security Award Letter?]
Steps to Take to Address Social Security’s Bankruptcy Risks
The future of the Social Security program will depend on several factors, including upcoming decisions by lawmakers. “Social Security cannot go bankrupt since money is continuously being paid into the trust funds by those who are currently working and paying taxes,” says Martha Shedden, president and co-founder of the National Association of Registered Social Security Analysts in the San Francisco Bay area.
“However, if Congress makes no changes, it is possible that a portion of Social Security benefits will be cut sometime around 2034,” Shedden says.
There are many ways that the program can be fully funded and remain solvent. “Making small changes regarding eligibility rules, benefit calculations, taxable earning amounts and rates or dependent benefit formulas are just a few of the hundreds of potential options,” Shedden says.
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Here’s How Much Money You Could Lose if Social Security Goes Bankrupt originally appeared on usnews.com
