A $ 4,356 reduction in social security benefits is coming – will you be ready?

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This year has been difficult in many ways for the American public. The COVID-19 pandemic has completely changed the way we interact with each other, and it has displaced more than 20 million workers. If you are an investor, you have also been caught in a mad rush, with a stock market of around 10 years of volatility over a four month period. And don’t even get me started on the hornets of murder.

But one of the few comforts that working Americans have always been able to take is the idea that if they earn 40 credits for life, a social security benefit will await their retirement.

Image source: Getty Images.

The social security program went through 13 recessions before the COVID-19 pandemic. Despite some obviously bleak prospects during these previous recessions, you will notice that social security is still there and has been providing continuous benefits to retirees for over 80 years. That’s why it’s often referred to as America’s most successful social program.

But just because this program has been historically successful does not mean it is in great shape to serve future generations of retirees.

Social security faces nearly $ 17 trillion in funding gap

Since 1985, the annual Social Security Council report, which examines the short-term (10 years) and long-term (75 years) prospects of the program, warned that the collection of long-term revenues would be insufficient to cover expenses. In other words, social security would not bring in enough money to cover the estimated payments to all beneficiaries over the next 75 years. Based on the 2020 report, the program’s unfunded bonds have now grown to $ 16.8 trillion (yes, with a “t”).

How can this happen? Let me assure you that just born (and now retired) baby boomers are not the only factor. There are more than half a dozen factors that have played a role in the growing social security funding gap, including increased longevity, lower birth rates, lower levels of net legal immigration and even income inequality.

If lawmakers fail to quickly close this funding gap, administrators have estimated that the program will completely exhaust its $ 2.9 trillion in asset reserves (i.e., net cash surpluses accumulated since its creation) by 2035. What happens then is often a point of great importance. restraint.

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Average benefit for retired workers could be reduced by more than $ 4,300 in less than 15 years

The good news, if there is a silver lining to get out of this mess for the elderly and future retirees, is that Social Security will not be bankrupt, even if Congress does not act. Two of the three sources of Social Security funding – the 12.4% wage tax on earned income and the taxation of benefits – are sources of recurring revenue. As long as the American public continues to work, the money will go to the social security program to be disbursed to eligible beneficiaries.

On the other hand, no money left in the asset reserves would mean that the current payment schedule, including cost-of-living adjustments, would no longer be viable. Translation: Benefit reductions would be necessary to maintain social security solvency for decades to come.

According to the Trustees’ latest report, the Old Age and Survivors Insurance Trust could not pay 76% of the benefits until after its funds were cleaned up. In other words, this means that retired workers and survivors could face a 24% cut in benefits by 2035.

Now think about it for a moment. In May 2020, the Social Security Administration released data showing that the average retiree was earning $ 1,512.63 per month. This represents $ 18,151.56 per year for the typical retiree. A 24% reduction in benefits would be equivalent, in May 2020 dollars, to a reduction in benefits of $ 4,356 per year. This is terrifying when you consider that 62% of retirees rely on their monthly payment to represent at least half of their income.

The Capitol facade in Washington, D.C.

Image source: Getty Images.

What are the options for strengthening social security?

At this point, all ideas are on the table to resolve the social security funding gap. But the punishment for brass is that a social security fix involves either increasing additional income, cutting spending, or instituting a combination of the two.

Most Democrats in Congress prefer to raise additional income to solve the social security cash flow problem. To do this, the wage tax ceiling associated with the wage tax of 12.4% on earned income should be increased or removed. In 2020, all wages and salaries up to $ 137,700 are subject to payroll tax, while income above this level is exempt. To increase or remove the cap, higher-income workers would have to contribute more to the program. For more context, the amount of earnings exempt from payroll tax rose from $ 300 billion in 1983 to $ 1.2 trillion in 2016.

As for Republican lawmakers, most prefer the idea of ​​cutting long-term spending to strengthen social security. This would be done by gradually raising the full retirement age from its expected peak of 67 in 2022 to 70. In doing so, future generations of retirees should decide whether to wait longer for their full monthly payment or accept a larger monthly reduction for early claims. Regardless of their choice, the lifetime benefits paid would decrease for future generations of retirees.

A third option exists where Democrats and Republicans work together on a bipartisan solution, which, in my opinion, would be the most optimal solution for social security.

The problem is that the Democrats and the Republicans each have a solution that they think works, and therefore did not want to find common ground with their opposition. This battle of political pride puts social security in a precarious position – and the longer Congress waits to act, the more painful the solution will be for American workers.

If legislators do not meet quickly, current and future beneficiaries may be forced to prepare for the reality of losing thousands of dollars in annual income to maintain Social Security solvency.



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