By Jamie Hopkins
You’ve probably heard of the three-legged retirement savings “stool.” The idea is that a quality savings plan for retirement starts with having three aspects of saving: personal savings, employer retirement savings and government-provided benefits.
But with the slow demise of pension plans from private employers and the move to put more onus on personal savings, the three-legged stool is starting to look more and more like a two-wheeled bike. We can still move forward, but it’s going to take more work than before.
The other aspect – government-provided benefits – also faces a changing landscape that effects the retirement savings stool/bike’s stability. At question is the funding status of Social Security.
The Current Landscape
The 2019 Social Security trustee report was just released this past week. The report details the financing and future security of Social Security and Medicare – the results aren’t encouraging*.
The report states that the combined funds of the trust will be depleted by 2035, resulting in a cut of benefits by roughly 21 percent. This would be devastating to the millions of Americans who rely on Social Security for retirement income.
In fact, Social Security is the bedrock of retirement income for many Americans – roughly two thirds of retirees receive more than 50 percent of their income from Social Security and roughly 40% of unmarried retirees receive 90 percent or more of their income from Social Security.** A 20 percent or more cut to the system would devastate these individuals.
It’s important to recognize that Social Security doesn’t fail or disappear in 2035. This is often misunderstood and misreported. When the Social Security trust funds are depleted, the current tax system would provide a significantly sized income each year, allowing the system to pay almost 79 percent of benefits.
In general Social Security is a PAYGO system – it takes in taxes and pays them out each year to generate the income needed to meet promised benefits. However, people are living longer than expected, the senior population is growing, and the number of people entering the work force compared to the number in retirement has shrunk. All these factors have put stress on the system.
Promising Legislation
It’s time to update and modernize Social Security. One piece of legislation with those intentions is the Social Security 2100 Act. Proposed to Congress in January 2019, the bill would increase taxes, increase benefits for many people and fix the funding shortfall for the next 50 or more years. It has a wide range of support with over 200 co-sponsors. However, the bill as drafted is unlikely to pass both houses of Congress. The bill would need some major modifications including some benefit cuts to appease the current Congress.
The bill is still a significant step forward and it sparks the discussion on Social Security’s future. In recent years no proposed piece of legislation has had strong support from both parties – another reason the Social Security 2100 Act is a game changer.
Social Security is very important for American retirement security, and the fact is the system needs fixing – and sooner rather than later. But even in the worst-case scenario, the system will not go away and will still provide most of its promised benefits. The future of Social Security is a topic Americans need to care about as it’s a pivotal piece to their future of retirement security.
*Social Security: What Would Happen If the Trust Funds Ran Out?