Social Security and the Future of this Important Benefit

As we are all keenly aware, this is an election year. This means you can expect to hear our presidential candidates being asked about their plan for Social Security going forward.

While you may not hear a clear answer from either candidate, you can rest assured that Social Security is not going bankrupt.

Social Security benefits are primarily funded by the payroll taxes collected from today’s workers. Money goes into a pot called The Old Age and Survivors Insurance Trust Fund. Benefits are dispersed from there. Since it is a pay-as-you-go system, as long as workers are paying payroll taxes, Social Security benefits will be paid out.

Therefore, the problem isn’t bankruptcy – the problem is that the program faces a long-term funding shortfall, that left unaddressed will create a reduction of benefits for future retirees.

For decades, the Social Security system collected more in payroll taxes and other income than it paid out in benefits. Thus, a large reserve was built up. Once the program’s costs (benefit payouts) exceeded it’s income (payroll taxes), Social Security started drawing from the reserve fund to make up the difference.

There are two major factors contributing to the depletion of the reserves. First, life expectancies have drastically increased due to healthier lifestyles and medical advances. And second, the younger generations are getting smaller which means fewer workers paying into the program compared to persons drawing from it.

There are ways that Congress can pathc the shortfalls. They can consider:

• Increasing tax revenues by raising payroll taxes.
• Reduce benefits or increase taxes for higher earners.
• Raising the retirement age to bring it more in line with today’s longer life expectancies.

Bottom line, there are no easy answers. Chances are that any one or combination of these solutions would compromise some particular part of the population.

The sooner lawmakers act, the more options they will have available. The longer they wait, the more abrupt and painful the changes will be. No doubt Americans will have to adapt to some type of change, so the sooner a decision can be made, the better.

Social Security benefits can be one of the most significant forms of income for your retirement. As always, if you have any questions about how Social Security impacts your retirement and financial plan, I welcome your call or a meeting.

Sources: ssa.gov, cnbc.com, investopedia.com

Any opinions are those of the author and not necessarily those of Raymond James. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making a decision, and it does not constitute a recommendation. All opinions are as of this date and are subject to change.