In the world of retirement planning, Social Security retirement benefits, referred to as Old Age and Survivors Insurance by the Social Security Administration (OASI), are still included as a source of income in retirement, but should it be?
For those Americans that will retire after 2035, the future of receiving their projected full retirement monthly benefit looks bleak – OASI estimates the ability to pay 77% of promised benefits at that time. OASI and Disability Insurance (DI) benefits pay from the Social Security Trust Funds, which released its 2019 Annual Report to Congress in April 2019.
Without a plan to provide additional funding into the OASI program, promised future benefits are in jeopardy. The time to fix the problem is now, while SSI taxes are being collected to invest in the OASI trust fund for the benefit of todays and future retirees. Why are we experiencing a benefits funding issue? Highlights from the report include:
- The total annual cost of the program is projected to exceed total annual income, for the first time since 1982, in 2020 and remain higher throughout the 75-year projection period. As a result, asset reserves are expected to decline during 2020. Social Security’s cost has exceeded its non-interest income since 2010.
- The year when the combined trust fund reserves are projected to become depleted if Congress does not act is 2035 – gaining one year from last year’s projection. At that time, there would be sufficient income coming in to pay 80 percent of scheduled benefits.
Social Security retirement benefits (OASI) collect from today’s worker and employer payroll taxes to pay current retirees. The collected revenue is used to pay current recipients and the additional revenue invests into the trust fund.
Currently, employers and employees each pay 6.20% of payroll taxes on the first $128,400 of earnings to fund Social Security and an additional 1.45% (evenly split) to support Medicare for a total of 15.3%. Self-employed individuals pay the full 15.3% themselves.
The payout in Social Security retirement benefits is close to exceeding what is currently brought in for 2020 but will continue to operate on the projected plan’s payouts by accessing reserves in the trust fund. However, the 75-year projection of payouts indicates a depleting reserve in the trust fund if SSI taxes stay at the current rate for both the employer and employee contribution.
With a growing aging population and fewer workers paying into OASI due to a declining birth rate, the U.S. has an increasing problem on its hands to continue supporting the social security retirement benefits system. To date, lawmakers haven’t stepped up to fix the problem, but have pushed it further out in time to amend. The only real way to circumvent the shortage is by increasing the SSI tax collection from payroll taxes.
If you would like to have Social Security removed as a source of income in your financial plan, please let us know. Without that income source, we will determine together ways for you to make up the difference.