Social Security is a program that has supported American retirees since 1935. Retirees rely on and enjoy the benefits that it provides, yet this helpful program does not operate without problems.
The Social Security Administration (SSA) monitors and makes changes as needed to adapt to a dynamic economy and provide a stable base income for retirees. However, even with these changes, most people cannot depend on Social Security alone to meet their retirement goals.
Full Retirement Age (FRA)
The full retirement age (FRA) is currently set between 66 and 67 years of age. It gradually increases every year at a rate of two months. The FRA was originally set at 65 years old but due to the funds of the program running low, the FRA was altered in 1983 to gradually phase up to 67 years old. As it now stands, for those born in 1955, the FRA is 66 years and 2 months old; for those born in 1956, the FRA is 66 years and 4 months. This pattern continues until we reach those who were born in 1960 or later and the FRA plateaus at 67 years old.
The FRA was never intended to go past 67, yet it is entirely possible that the government will need to raise the FRA even higher to meet future funding requirements and the shifting retirement landscape.
Social Security Funding Challenges
Retirement Age and Life Expectancy: Americans are retiring later in life. In 2000 we saw the average age of retirees at 62 years old, but today that number has increased to 66 years old. In addition to working longer, people are also now living longer. If life expectancy in the United States continues to increase, and the FRA is not adjusted, Social Security will be drained at a faster and faster rate.
Baby Boomers: With the baby boomer generation retiring, the Social Security fund is expected to take a big hit over the next couple of decades and adjustments will need to be made. Since workers fund Social Security, a sudden drop in the number of people working will cause a drop in the funding of Social Security. On top of this, the trust funds that back Social Security are projected to be lower than the funding rate in 2034, which would cause a reduction of approximately 25% of the promised benefits that everyone receives. The SS administration will more than likely meet these funding challenges by increasing the FRA and/or raising the contributions of current workers.
COLAs: It is also important to consider COLAs when understanding the gradual depletion of the funds that back Social Security. COLAs are simply “raises” to the dollar value of benefits, which are intended to maintain the buying power of retirees when there are increases in the cost of living for the general population. In 2022, retirees saw a bump of 5.9% in their social security benefits due to cost-of-living adjustments.
Due to the current inflation rate, the Senior Citizens League is estimating that seniors on Social Security could be in line for a 7.6% COLA in 2023. While this may sound like good news, these increases do not increase the buying power of beneficiaries in relation to the economy; they are simply an effort to maintain the current buying power of SS. Or, to put it another way, a 7.6% COLA will not create a scenario where Social Security beneficiaries come out ahead financially. The reason for COLAs is that living expenses have increased, and the adjustments in benefits are designed to maintain the buying power of beneficiaries. Quite often, the cost of Medicare also goes up, and the increase in Social Security becomes more of an offset for this continued rise in healthcare costs.
What to Expect from Social Security in the Future
Planning for future benefits is different for people of various ages. For people who are 60 years old or older, there is less reason to worry that any prospective changes would affect their benefits. Anyone who is between 45 and 60 years old should plan for benefits reductions of about 5% if no adjustments are made at this time. For people who are even younger, a 10% or even a 15% reduction is a very plausible scenario if nothing were to be done.
With this information in mind for younger savers, it seems clear that relying on Social Security as a significant contributor to your retirement may not meet all your financial goals. Most people want the security of financial freedom available to them when it comes to their future. Why not take your retirement into your own hands? Having a financial plan plays an important role in the pursuit of financial independence. It is never too early to prepare for a better future. The time is now.
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