If you’re worried that Social Security and Medicare benefits will be reduced or even eliminated by the time you retire, you are not alone. Reports in the news have created some anxiety and some confusion about their stability and how these important programs might change.
Social Security was never meant to be the only source of income for retirees. It was meant to be part of a three-legged stool of income sources for retirees: Social Security, pensions, and savings.
Social Security is funded through mandatory contributions from workers and their employers. Workers pay 6.2 percent of their earnings, up to a cap of $137,700. Employers pay a matching amount. Self-employed workers pay both the employee and the employer share for a 12.4 percent total.
These contributions are held by special trust funds that were established to pay Social Security and Medicare benefits and administrative expenses. Any trust fund assets that aren’t needed to meet current costs are invested in special issue U.S. government securities.
You can start receiving Social Security retirement benefits as early as age 62, but your benefits are decreased by about one-half of one percent for each month you start receiving benefits before your full retirement age. Your full retirement age depends on the year you were born. If you were born before 1955, your full retirement age is 66. If you were born after 1959, your full retirement age is 67. If you delay receiving benefits beyond your full retirement age — up until age 70 — you will receive credits that increase your monthly benefits.
The total benefits you receive depend on these calculations, along with your earning’s history. The maximum monthly Social Security benefit anyone can earn in 2020 is $3,790, and that’s for someone who files at age 70.
The good news is that we’re living longer. When the Social Security Act was passed in 1935, the average life expectancy was 61 years old. The Social Security Administration now estimates that a 65-year-old today can be expected to live, on average, another 20 years.
Members of the Baby Boom generation — those born from 1946 to 1965 — have been, and will continue to be, reaching retirement age. By 2035, the number of Americans 65 and older will increase from today’s figure of approximately 56 million to more than 78 million.
In the year 2035, the oldest Baby Boomers will be 89, and the youngest 70. By 2035, mandatory contributions will be enough to pay for only 75 percent of scheduled Social Security benefits.
An important reason for the projections that Social Security will not be able to meet all of its obligations by 2035 is lower birth rates. The CDC reported that births in 2018 hit the lowest number in 32 years.
There’s no shortage of proposals for fixing issues that are likely to impact Social Security benefits for senior citizens. Changes that are now being discussed include:
- Increasing the full retirement age to 70, trimming cost-of-living adjustments,
- Reducing benefits for wealthier retirees,
- Diverting a percentage of payroll taxes from retiree benefits to private accounts, and
- Investing Social Security trust funds in the stock market.
There are pros and cons to each of these proposals, depending on your point of view. The most controversial are those that propose investing Social Security trust funds in the stock market, or diverting contributions to private security accounts. Proponents argue that investing Social Security assets could significantly increase returns. Opponents argue that inherent market risk could deprive some retirees of the security that Social Security was created to provide.
We can expect to hear much more on these proposals in the future.
The above is the opinion of the author and should not be relied upon as investment or legal advice or a forecast of the future. It is not a recommendation, offer, or solicitation to buy or sell any securities or any investment strategy. It is for informational purposes only. The above statistics, data, anecdotes, and opinions are assumed to be true and accurate. Grand Canyon Wealth Management does not warrant the accuracy of any of these.
Michael J. Day CPA PFS™ is the founder of Grand Canyon Wealth Management, where he provides financial planning, estate planning, wealth management, and investment services. For more information, or to schedule a complimentary consultation, visit grandcanyonwealthmanagement.com, call (480) 590-3590 or e-mail Michael.j.day@lpl.com. You may also follow him on Twitter @GrandCanyonWM. Securities and advisory services provided through LPL Financial, a registered investment advisor member FINRA/SIPC. Grand Canyon Wealth Management is not an affiliate company of LPL.