If you're just reading the headlines regarding Social Security's 2019 Trustees Report released on April 22, you may be thinking retirees will be left without any benefits by 2035. The report stated that Social Security's costs are expected to exceed income in 2020, meaning trust fund reserves will be tapped so that beneficiaries can receive full payouts. If current policies go unchanged, trust fund assets will continue to be tapped until 2035 when the reserves run dry.
Yes, the report projects Social Security's trust fund reserves will be depleted by 2035, but that doesn't mean retirees won't receive any benefits.
What happens when Social Security's trust funds are depleted?
Social Security's primary source of revenue comes from payroll taxes. As long as payroll taxes continue to be deducted from our paychecks, Social Security can still pay a portion of scheduled benefits when reserves are tapped out. Payroll taxes amount to approximately 80% of Social Security's annual costs. So, recipients may see as much as a 20% reduction in scheduled benefits.
This isn't the first time depleted reserves were ensuing. Reserves in Social Security's larger trust fund, which pays retirement benefits, were nearly depleted in 1982; however, no beneficiary was shortchanged because Congress enacted temporary emergency legislation that permitted borrowing from other federal trust funds. Additional legislation was passed later on to improve financing. Four years later, borrowed amounts (plus interest) were repaid. Lawmakers still have time to take action this time around so it's too soon to know what's actually in store for future benefits.
Should retirement plans consider Social Security's financial status?
In reality, Social Security benefits were never intended to be a retiree's sole source of income. Social Security should be viewed as a supplement to other sources of retirement income, such as personal savings, IRAs, 401(k)s, and pension income. But, as with any uncertain variable in a financial plan, it should be considered when planning for retirement.
Social Security benefits provide a steady stream of income in retirement, which is why it's the first resource many retirees rely on to fund ongoing expenses. And the uncertainty of future payout amounts is another instance where budgetary flexibility can help investors reach favorable outcomes—even under circumstances that may be out of their control.
Social Security's outlook isn't great, and a potential reduction in benefits is certainly reason for investors' concern. To compensate for the uncertainty in Social Security benefit amounts, make sure other pieces of your retirement puzzle are intact and incorporate budgetary flexibility into your plan. Take savings and planning matters into your own hands. Just because it takes time to enact legislative changes to improve Social Security's outlook, that doesn't mean you should do the same for yourself.
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