The future of Social Security is becoming increasingly bleak by the day. Recent Congressional Budget Office estimates raise those alarm bells further, estimating you’ll run out of money by 2033. Their new assessment, released in mid-June, has set off alarm bells among financial experts and average Americans. With tax cuts introduced in President Donald Trump’s recent budget bill, the estimated depletion date has moved up to the end of 2032, according to Karen Glenn, Chief Actuary of the Social Security Administration.
Social Security is an essential lifeline for millions of Americans. It tries to make up approximately 40% of their pre-retirement income. A new survey conducted for NerdWallet found that a surprisingly high 36% of Americans under the age of 65 don’t believe Social Security will be there for them. They fear it won’t even be there when they are able to retire. The long-term viability of the program is starting to create increasing alarm, particularly among Millennials and Generation Z. First, they fear they won’t get anything from it.
Understanding the Benefits Structure
For people born in 1960 or later, full Social Security benefits become available at age 67. Depending on your payout, you may penalize your benefits by claiming early. Waiting to claim until you turn 70 will boost your benefits by 8% per year. The Social Security Administration uses a very complicated formula to calculate those benefits. This calculation considers the top-earning 35 individual calendar years of an individual’s work history.
Social Security was designed to be a backstop for retired Americans. It is not meant to be their only means of making a living. The recent trend towards a decline of defined benefit pension plans has aggravated this situation. The reality is, as of 2023, just 8% of workers aged 18 to 29 have these plans available to them. Ultimately, most younger Americans are left to wonder how they’ll be able to afford their financial futures.
“To put it in simple terms, they’ll have to change the benefit formula,” – Catherine Collinson, president and CEO of Transamerica Institute.
Implications of Trust Fund Depletion
The consequences of a lost trust fund are bleak. If the Social Security trust fund runs out, the government will only be able to pay beneficiaries approximately 77% of what they are owed. This all-too-true reality makes it imperative to deal with Social Security’s fiscal shortfall before more harm is done. The Social Security Administration now has several years’ worth of annual warnings about the imminent depletion, but no meaningful reforms have been made.
Phillip Battin, president and CEO of Ambassador Wealth Management, emphasizes that understanding Social Security benefits and their nuances is paramount for future planning. He notes that people can’t just focus on one picture because they have to plan for multiple possible outcomes for retirement.
“In decision analysis, you look at the scenario for planning — worst case scenario, best case scenario, average case scenario,” – Phillip Battin.
On the current path, absent action, too many future retirees will be left to depend on a much smaller base of support. Battin warns against idealistic thinking, stating that “the American mind always wants to build on the best-case scenario,” which can lead to troubling outcomes.
The Road Ahead
Financial experts on both sides of the aisle unanimously state that action now is required to remedy these failures. Catherine Collinson suggests that changes must be made within the next few years to ensure the longevity of Social Security. As the debate heats up over possible budget cuts and cuts to earned benefits, millions of Americans face an increasing level of doubt and fear concerning their futures.
The current debate over the future of Social Security only underscores the desperate need for better long-term planning education and outreach with regard to retirement income benefits. Battin says it’s all about being prepared in advance for whatever comes.
“It’s the only way to have true peace of mind,” – Phillip Battin.
As policymakers and experts deliberate on potential reforms, it is essential for individuals to stay informed about their options and prepare for an uncertain future. Knowing where Social Security fits into a larger retirement plan is key. This is doubly true considering the challenges looming ahead.