When you retire, there’s a really good possibility that you’ll rely on Social Security benefit, to some degree, to help make ends meet.
According to a Gallup survey conducted in April, approximately five out of six nonretirees implied that Social Security would represent either a major (30%) or minor (54%) source of income during retirement. This combined 84% ties a 15-year high for reliance, based on nonretirees’ responses.
The changing dynamics of Social Security
Yet, being reliant on Social Security is a somewhat dangerous proposition for those looking to retire in more than a decade’s time. The latest Board of Trustees report, released in early June, shows that the program will have $1.7 billion more in expenses this year than it’ll generate in revenue. That’s the first time this has happened in 36 years. And while $1.7 billion isn’t a particular large figure in relation to the trust’s $2.9 trillion in asset reserves, this changing dynamic is clearly cause for concern.
Of course, what Social Security will look like during your retirement will ultimately depend on when you reach the eligible claiming age of 62. Let’s take a look at what folks in their 40s (i.e., people born between 1969 and 1978) can expect from America’s most important social program.
Good news: It’s not going anywhere
If you are a working Americans in your 40s, there’s one thing you should know above all else: Social Security will be there for you when you retire. Even though the Board of Trustees has projected that the program’s net cash outflow will accelerate each year after 2019, and will result in the complete exhaustion of $2.9 trillion in asset reserves by 2034, Social Security is in absolutely no danger of going bankrupt.
The secret to its success lies in the fact that two of its three sources of income are recurring. Whereas the interest income earned on its asset reserves would disappear if its excess cash were to be exhausted, the 12.4% payroll tax on earned income of up to $128,400, and the taxation of Social Security benefits, ensure that income will still flow into the program for disbursement. Or, to put this into plainer English: As long as the American public keeps working, and Congress doesn’t adjust how the program is funded, the payroll tax and the taxation of benefits will ensure Social Security has no chance of going bankrupt.
Bad news: Your payout might be reduced
However, although Social Security will march on, there are consequences to the program having a persistent, and growing, net cash outflow. One of them is the expectation for a cut in benefits, assuming Congress doesn’t find a way to raise additional revenue.
If the Trustees’ projection is correct, and the program depletes its asset reserves by 2034, then it’s been estimated that a 21% benefit cut will be needed to sustain payouts through the year 2092. The magnitude of this reduction is such that no further cuts should be needed over the long term, which is defined by the report as the next 75 years. Slashing benefits by up to 21% won’t go unnoticed, and it’s a clear warning to people in their 40s to reduce their expected reliance on Social Security, if possible.
More bad news: The purchasing power of Social Security dollars will further dwindle
Not that any of you in your 40s need anymore rain on your parade, but the purchasing power of Social Security dollars is liable to decline substantially between now and when you begin claiming benefits.
According to an analysis from The Senior Citizens League, the purchasing power of a Social Security dollar has dropped 34% since the year 2000. What $100 in Social Security income used to buy in goods and services in 2000 now buys $66 worth of the same goods and services…..Read More>>>>