The Future of Retirement – Part One

Answer: The outlook for Social Security’s future does raise concerns. The problem isn’t insolvency; the issues and challenges are more about changing demographics. Because it’s important for anyone planning to retire to understand those changes and what solutions are available, in the next three weeks, we’ll begin with an overview of Social Security, the outlook for retirees, and how destiny is or isn’t demography.

Social Security benefits are funded by payroll taxes collected from today’s workers. It’s a pay-as-you-go system; if workers are paying payroll taxes, Social Security benefits will be paid. For decades, the Social Security system collected more in payroll taxes and other income than the benefits it paid out, creating a reserve. In 2021, when the program’s costs began exceeding its revenue, it started drawing from this reserve.

When those reserves are depleted, which is expected to occur in about 10 years, benefits will be reduced by an estimated 17%. If Congress takes no advance action, the fund is expected to be able to pay 83% of current benefits in 2035, declining to 73% in 2098.

Today’s baby boomers have a greater life expectancy than those in earlier generations. At the same time, younger generations are getting smaller, meaning fewer workers are paying into Social Security. And a smaller percentage of Americans’ income is subject to the payroll taxes funding Social Security because the earnings of the highest-paid workers have grown faster than those of the average worker.

Sixty-seven million Americans receive Social Security payments each month – it’s the main source of income for people 65 and older – making its future important. To patch the shortfall, Congress has some options.

1. Increase tax revenue

The most obvious way to increase Social Security funding is raising payroll taxes. Employers and employees currently each pay 6.2% for Social Security. Increasing to 15.75% shared between employes and employees could ensure solvency for 75 years, but that may be unaffordable for lower-income workers.

Another option is adding new tax sources. The American Academy of Actuaries has suggested taxing investment income or increasing estate and gift taxes, an idea likely to face resistance.

Additionally, the Social Security tax rate applies to annual wages up to $176,100. Removing that cap and taxing all earned income could eliminate 78% of the shortfall. Traditionally, earners above $176,100 are subject to a wage cap to prevent higher taxation that may not justify the benefits. Social Security’s political support comes from the idea that you can receive back a benefit you have paid into; removing the cap could undermine that support.

2. Reduce benefits for high earners

Another idea is to reduce future benefits for high earners not yet collecting Social Security, based on the assumption they’ll rely on it less. But this alone wouldn’t curb Social Security expenditure enough to address the problem.

3. Raise the retirement age

Today, the full retirement age (FRA) is 66 and two months for those born in 1955, gradually increasing to 67 for anyone born in 1960 or later. Some lawmakers propose raising the FRA to 70 to reflect today’s longer life expectancy. This alone could eliminate nearly a third of the Social Security trust fund’s 75-year deficit. However, working to an older age could be especially challenging for low-income Americans and those in physically demanding jobs.

No easy answers

Odds are a solution would comprise some combination of these actions: higher taxes for some, lower benefits for some, more years on the job for some. And any proposal is likely to face opposition. The sooner policymakers act, the more options they will have, and the more time pre-retirement Americans will have to prepare for changes.

In the next two weeks, we’ll take a look at how retirement ages around the world are going up, and how Artificial Intelligence (AI) and anti-aging work may bring answers to our demographic dilemma. Stay tuned for Part Two and Part Three. Stay focused and plan accordingly.