Financial guidance on strategies and obstacles in planning for Social Security benefits, focusing on the 90th year of its existence, tailored for financial advisors.
Social Security, a vital program providing benefits for older people, spouses, minor children, the disabled, and those who are widowed or divorced, has been a cornerstone of financial security for millions of Americans. However, the program's future is under threat, and understanding its purpose, changes, and potential future is crucial for comprehensive retirement planning.
The full retirement age (FRA) varies depending on the year you were born, and claiming benefits before FRA will result in a loss of more than 8% of your yearly benefit amount. On the flip side, waiting until you reach FRA to claim benefits can increase your monthly benefit by 8% a year until you reach 70. Once you hit your FRA, the threshold is removed, and you can make whatever you want and still claim 100% of your benefit.
Your Social Security benefit is based on your top 35 years of earnings, not your last 10 years of earnings. The calculation is quite involved, but the first decade of those 35 years carries more weight than the last. Pre-retirees should explore and plan for other streams of income in retirement, as the Social Security Administration limits your annual income if you claim benefits early and earn more than $22,000, with a penalty of $1 for every $2 you make above the threshold.
The current downward spiral of the Social Security trust fund won't stop unless Congress acts quickly. Initial estimates predict that benefits will have to be reduced by 20% to 25% to keep Social Security going. Various proposed solutions to prevent Social Security benefit reductions by 2033 focus on increasing revenues, controlling costs, and making the benefit formula more progressive.
Key proposals include raising or eliminating the payroll tax cap, changing how cost-of-living adjustments (COLA) are calculated, increasing the retirement age, reforming benefit formulas to be more progressive, protecting Social Security trust funds, raising payroll tax rates, and combining revenue increases and benefit adjustments.
Social Security reform has become a politically contentious issue, with proposals for changes often being met with resistance. It is recommended to wait until you reach FRA to claim benefits, but seeking professional guidance if you need to deviate from that is advisable.
A lesser-known fact is that if your ex is already collecting benefits, you can collect a spousal benefit that equals half their total benefit or your own benefit, whichever is larger. The Social Security program is funded through payroll taxes, with the idea that Americans will pay into it during their working years and benefit from it in retirement.
Changes in life expectancy, declining birth rates, and an unbalanced worker-to-beneficiary ratio have put the Social Security program's future at risk. Without such reforms, projections suggest Social Security could only pay about 81% of scheduled benefits by 2034, leading to potential benefit reductions averaging around 24% for typical dual-earner couples at the start of 2033. These solutions are the focus of ongoing legislative and policy debate to ensure Social Security’s solvency and adequacy for future retirees.
[1] "Social Security Expansion Act." National Committee to Preserve Social Security and Medicare. https://www.ncpssm.org/take-action/legislation/social-security-expansion-act/
[2] "Social Security and Medicare Lockbox Act." National Committee to Preserve Social Security and Medicare. https://www.ncpssm.org/take-action/legislation/social-security-and-medicare-lockbox-act/
[3] "Social Security's Long-Term Financial Outlook." Social Security Administration. https://www.ssa.gov/OACT/TR/2022/index.html
[4] "Social Security Programme: Challenges and Prospects." United Nations. https://www.un.org/development/desa/policy-analysis/policy-papers/2020/Social-Security-Programme-Challenges-and-Prospects.html
[5] "The Social Security 2100 Act." National Committee to Preserve Social Security and Medicare. https://www.ncpssm.org/take-action/legislation/the-social-security-2100-act/
- To secure a robust retirement plan, it's essential to examine alternative investment avenues for income, such as wealth-management, business, or personal-finance strategies, beyond relying solely on Social Security benefits, given the uncertain future of the program.
- In preparing for retirement, understanding key policy discussions, like the Social Security Expansion Act, the Social Security and Medicare Lockbox Act, the Social Security 2100 Act, and the proposed reforms to Social Security's benefit formula, is crucial for making informed decisions about managing one's wealth and planning for retirement income.
