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Social Security isn't going away, but changes need to be made

It seems everyone is talking about the U.S. Social Security program. Analysts, economists and politicians express concern that the program will run out of money. This naturally scares current and soon-to-be retirees.

While adjustments need to be made, current projections tell us the program isn't going to go broke - however, according to many studies, if nothing is done to address the current funding issue, retirement benefit payments may need to be reduced to 75% by 2035. These reduced benefit payments should be able to continue at this rate until 2094.

Social Security benefits matter

Since its inception, Social Security has evolved with the times. President Franklin Roosevelt enacted the program with the Social Security Act in 1935. The program paid retirement benefits to workers 65 and older.

In the 1970s it was expanded to provide benefits for workers as early as 62 and added annual cost-of-living adjustments (COLAs) to deal with inflation rate changes.

Today, Social Security has grown into a $2.9 trillion program, that covers about 178 million workers. For roughly half of the American senior population, these benefits account for half of their retirement income.

On average, Social Security provides about 40% of a worker's lifetime income. The formula gives larger benefits (as a percentage of income) to lower income workers and smaller benefits (as a percentage of income) to higher income workers.

For those with higher incomes, including corporate executives and business owners, although their future benefits may be smaller in relation to their current earned income, there is a cap on the total Social Security taxes that are withheld each year ($142,800 in 2021). However, there is a possibility that Social Security taxes may be withheld from even higher incomes in the future to maintain the future solvency of Social Security.

Fewer paying Into Social Security

The funding of the program has also changed over time. Back in 1950, there were about 16 workers who paid into the Social Security system for every one person receiving monthly retirement benefits. Today, about 2.75 workers pay into Social Security for every person receiving benefits. This ratio is projected to drop further by 2035 to about 2.3.

Reasons for the decrease include declining birth rates, increasing longevity, and the increasing levels of claimed retiree benefits. At this rate there may not be enough workers to continue funding retiree benefits in the future.

COVID-19 effects

Most feasibility projections were completed before the COVID-19 pandemic. We're expecting reduced Social Security payroll taxes thanks to higher unemployment levels. Workers who decided to retire early started drawing from the program early. Preliminary estimates on the effects of COVID-19 accelerate the benefit reduction year from 2035 to about 2032.

Where do we go from here?

Without some action, there are potential problems with the future of full Social Security benefits as they stand now. Possible solutions being discussed:

• Increase the amount of worker earnings subject to the Social Security payroll tax from its 2021 maximum level of $142,800.

• Increase the Social Security payroll tax rate for all workers from its current 12.4% rate (split by employees and employers).

• Increase the full benefit retirement age from 67 (for anyone born in 1960 or later).

• Reduce the percentage of a worker's earnings that are included in the Social Security benefit formula which will reduce future benefit payments.

• Reduce the rate of annual COLA increases.

This isn't a new problem. In fact, in 1983, Congress addressed similar funding issues by raising the retirement age from 65 to 67. Hopefully, Congress will once again be able to successfully address the issues. Because Social Security is so important to many, both now and in the future, at Capstone Financial Advisors, we're watching this closely.

• Robert J. Wootton, MBA, CFP, is a senior wealth advisor and partner at Capstone Financial Advisors.

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