Investing

When Is Social Security Going to Collapse?

Austin Smith

Published: May 30, 2024 9:30 am

Social Security is projected to become insolvent by 2035, resulting in retirees receiving only 83% of their full benefits unless Congress intervenes. Potential congressional actions include increasing the tax rate, raising the income ceiling, raising the retirement age, or reducing benefits. Seniors are advised not to rely solely on Social Security for their retirement income. Instead, they should consider building an investment portfolio, adding dividend and income-producing stocks, taking on part-time jobs, or exploring other income-generating opportunities to ensure financial stability in retirement.

Transcript:

There are reports that Social Security will be insolvent in 2035, and that’s only 11 years away.

So someone retiring now will almost certainly be claiming benefits then.

The key question is what’s going to happen to those people?

Yeah, well, first, there’s some things that we should clear up here.

It’s not a true collapse, but it’s not that great either.

I’m not trying to paint a rosier picture.

What actually is forecast to happen is that after 2035, retirees at current forecasts are projected to receive only 83 percent of their full benefits due to them.

Now, that’s unless Congress intervenes.

And that last part is important.

So congressional action is necessary to prevent this shortfall.

There’s no other way out of it.

And the way that Congress would have to do that would likely either involve benefit cuts or an increase in payroll taxes.

So let’s talk about that last point and how payroll taxes drive Social Security.

Social Security is funded through payroll taxes with 6.2 percent coming from employees, 6.2 percent coming from employers.

Good for 12.4 percent of total taxes applied to the first hundred and sixty-eight thousand six hundred dollars of an individual’s income this year.

Those contributions go to support retirees with $0.85 of every dollar going to the Social Security Trust Fund and $0.15 going to a disability fund.

What would Congress have to do to prevent this 2035 shortfall, which as you said, it’s only 11 years away.

That’s really not that far.

If someone’s retiring today, they almost certainly will be running into that shortfall in 11 years.

So what could Congress do to intervene?

Well, they could increase the tax rate from that 12.4% total up to something closer to 15%.

They could increase the income ceiling.

So instead of taxing $168,000, they could start to push it up at a higher rate to maybe 175, $200,000 to try and claim more money.

They could raise the retirement age or they could reduce benefits.

Now, the healthiest thing for the program is probably these last two, raising the retirement age, or reducing benefits, but they’re the least politically viable.

They’re just simply not going to pass.

It’s an issue on both sides of the aisle.

It’s a third rail that Congress isn’t going to touch.

So we expect that it will be one of these two items.

They will either increase the tax rate or increase the income ceiling.

But our main advice for seniors today, based on this context, is just not to count on Social Security alone.

While it may not be going away, it’s certainly not going to get more generous and it’s not going to make your life in retirement any more comfortable.

To whatever extent possible, we are encouraging seniors to augment their social security income today by building an investment portfolio, adding dividends and income-producing stocks if they can, which is a godsend in retirement.

If they’re capable, considering taking on a part-time job as well, or if they have other ambitions for additional income, try something like a rental property.

The bottom line is, Social Security is on weaker footing than it has been in recent history.

And although it might not be fully collapsing in 2035, the picture that it’s painting is certainly pretty bleak.

And a lot of the things to fund it could further hurt the economy.

So we are encouraging seniors to take their retirement into their own hands, augment their assumptions for Social Security income by doing one of these four things today.