Financial Planning Strategies and Obstacles for Social Security in its 90th Year: A Handbook for Financial Experts
The Social Security programme, a cornerstone of retirement security for millions of Americans, is facing a critical juncture. The trust fund that pays out retiree benefits is projected to be depleted by 2033, according to estimates. However, it's essential to understand that Social Security benefits will not disappear, but may be reduced if no action is taken by Congress.
The programme provides benefits not only to retirees but also to spouses, minor children, disabled individuals, and those who are widowed or divorced. Spousal benefits, equal to half the ex-spouse's total benefit or the individual's own benefit, whichever is larger, can be collected from a spouse, provided the marriage has lasted for at least 10 years, the individual is not remarried, and the ex-spouse is collecting benefits.
Delaying Social Security benefits past the Full Retirement Age (FRA) can result in increased monthly benefits. Each year after FRA, benefits increase by 8% up until age 70. On the other hand, claiming benefits before FRA results in a loss of more than 8% of the yearly benefit amount.
The Social Security Administration limits annual income for individuals who claim benefits early, with a threshold of about $22,000. Any income above this threshold results in a penalty. Seeking professional guidance is recommended when deviating from claiming Social Security benefits at full retirement age.
Changes in life expectancy, declining birth rates, and an unbalanced worker-to-beneficiary ratio have put the Social Security programme's future at risk. To address the projected depletion of the trust fund, several reforms have been proposed.
One such reform is raising or eliminating the payroll tax cap, which currently limits taxable earnings at a certain amount, to increase revenue. Another suggestion is gradually increasing the payroll tax rate (FICA tax rate) to bring in additional funds to cover benefits.
Some proposals also include allowing the trust funds to invest in a broader range of assets beyond Treasury securities, which could increase the interest income and bolster revenues. Another potential reform is combining the Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) funds, which are currently separate and cannot transfer funds between each other by law, to better balance overall reserves and extend solvency.
Adjusting scheduled benefit levels is another proposed solution. If no change occurs, benefits would need to be reduced by approximately 23% starting in 2034 due to insufficient funds to pay full benefits.
As the depletion date approaches, there is increased urgency for Congressional action or for individuals to prepare by saving more outside Social Security. Pre-retirees should explore and plan for other streams of income in retirement.
The full retirement age varies depending on the year of birth, with people born from 1943 to 1954 reaching FRA at 66, and it gradually increasing to 67 for those born from 1955 to after 1960. The calculation of Social Security benefits is based on an individual's top 35 years of earnings, with the first decade carrying more weight than the last.
Social Security reform has become a contentious political issue, with any proposed changes being met with accusations of trying to ruin the programme. However, it's crucial to remember that timely action is necessary to secure the future of Social Security for future generations.
The Social Security Act was signed into law by President Franklin D. Roosevelt on August 14, 1935, and since then, more than 70 million Americans rely on Social Security to make ends meet. As we move towards 2033, it's essential to understand the challenges facing the programme and the potential solutions to ensure its longevity.
- To secure future retirement benefits, individuals may seek professional assistance in wealth-management and personal-finance, focusing on career-development and education-and-self-development, to explore other streams of income.
- As the Social Security Act faces potential changes, it's crucial for individuals to understand the program's intricacies, such as delayed benefit collection for increased periodic payments or the limitation of annual income for beneficiaries claiming early benefits.
- In the overhaul of the Social Security programme, proposals include allowing trust funds to diversify investments beyond Treasury securities, which could generate interest income, an essential aspect of investing.
