OOne of the biggest myths surrounding Social Security is the idea that the program runs out of money quickly. Although Social Security may exhaust its trust funds over the next decade and change, it should also receive a lot of money.
The reason? Social Security gets most of its revenue from payroll taxes — you know, the taxes that none of us particularly like paying. Now, that income stream is expected to decline once baby boomers begin to leave the workforce in droves, because even if younger workers begin to replace them, it may not be happening at a fast enough rate.
As long as Social Security continues to collect payroll taxes, it can continue to pay benefits. But that doesn’t mean there won’t be big changes in the way benefits are paid.
It’s not the worst case scenario
It’s natural to have a pessimistic outlook when it comes to Social Security, as the media tends to exaggerate that the program faces a serious financial shortfall in the coming years. It is totally true.
But the program is not about to go bankrupt. So today’s workers don’t have to give up the idea of being able to collect pension benefits.
That said, the benefits could undergo substantial changes. For one thing, they could be cut universally if lawmakers can’t find a way to pump more money into Social Security.
Fortunately, at this stage, no one is talking about a 50% or 60% reduction in benefits. On the contrary, the elderly are rather considering a reduction of 20%. Still, it represents a substantial loss of income for those who receive the bulk of their retirement funds from Social Security, so it’s something older people will need to be prepared for and workers will need to plan for.
Meanwhile, lawmakers may need to take drastic measures to ensure the long-term viability of Social Security. This could mean changing the eligibility rules.
Currently, anyone born in 1960 or later is entitled to full monthly social security at age 67. But lawmakers may need to push that age back to 68 or 69 to ease some of the strain on Social Security.
Then there are the payroll taxes — those needed to fund the program. Currently, high earners are only taxed on a portion of their income. If a need for income arises, lawmakers could choose to lift the wage cap so that workers are subject to social security contributions on all of their earnings.
Everyone must prepare for change
Social Security is not in danger of disappearing – that’s the good news. The bad news, however, is that drastic changes to the program may be inevitable in order to sustain it for years to come. This is something that current beneficiaries and workers will need to prepare for. And those in this latter boat may need to adjust their retirement plans accordingly as further Social Security updates arrive.
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