Personal Finance

3 Things That Might Keep You Up At Night When It Comes to Your Social Security Benefits

Chris MacDonald

Published: October 16, 2024 10:03 am

For retirees, or those thinking about or planning for retirement, retirement benefits are a lifeline for so many. Accordingly, ensuring that those payments are always going to be there (via doing one’s part and voting) and trying to supplement one’s income in retirement are becoming increasingly important to many who find themselves closer to retirement, or even those who are already taking in distributions.

There are plenty of factors to consider with respect to when to take distributions, and how long one may want to consider staying in the workforce. But we’ll all hopefully reach the age where we take distributions, and at some point, the planning stage is over.

For those in that stage of life, here are three things that might keep you up at night on the retirement front. This piece isn’t intended to terrify readers, and I’ll try to provide some suggestions of how to battle these concerns. But the reality is there are some scary components of how retirement benefits are currently funded and paid out that are worth paying attention to.

Key Points About This Article:

• Social security benefits are a lifeline for millions of Americans, but concerns over how underfunded this program is, and cost of living increases relative to inflation, are scaring many retirees.
• Here are the three things I think those entering or in retirement want to pay closer attention to moving forward.
• Take this quiz to see if you’re on track to retire ^(Sponsored)

Cost of Living Increases Could Come In Lower Than Inflation

Increasing prices across the economy have slowed, a reality that’s positively affected consumers. However, this progress on inflation could actually work against seniors, as the cost of living increase (COLA) announced by the Social Security Administration came in at 2.5%. 

A problematic reality behind how cost of living adjustments are calculated is that they’re often based off of lagging data. In other words, as inflation surged, seniors were forced to eat those costs up front and effectively wait a year to see their checks rise. Some statisticians have indicated that if COLA had matched inflation, recipients would have received an additional $10 per month by 2024, as calculated by NBC News.

Trust Fund Might Run Out Sooner Than Many Think

Given the fact that roughly 10,000 baby boomers are aging into retirement on a daily basis, and younger people are having fewer kids than they have in the past, it’s undeniable that the entire social security program has become much more unsustainable than it once was. That’s really not up for debate.

However, recent estimates of how long the Social Security Trust Fund has in terms of its ability to make payments to seniors based on the funds it currently has invested and expectations around how demographic shifts (more on that later) will impact its payouts over time have painted a rather stark reality for seniors.

During a recent webcast, Social Security Administration actuaries Steve Goss and Karen Glenn emphasized the significant consequences of the trust fund’s depletion. Glenn warned of an immediate 25% benefit cut if the trust fund is exhausted, disproportionately affecting low-income earners. Currently, retirees who earned about $30,000 annually receive around 50% of their income from Social Security, which could decrease to 40% by 2033. In contrast, high earners paying taxes at the cap of approximately $160,000 would see their replacement rate decline from 25% to 20% in the same timeframe.

The Social Security trust fund is projected to deplete around 2033, but this outcome isn’t inevitable. Lawmakers can implement changes to improve the fund’s financial health for the next 75 years, but that will require some serious political capital to be used up. We’ll have to see if progress is made on this front, and how much. But for now, this is going to be a key factor that will keep many retirees up at night, particularly those who are just aging into social security now.

Demographic Shifts Likely to Accelerate

With so many new retirees joining the fold each and every day, the age distribution of the U.S. population is shifting older at a rapid rate. Payroll taxes, which are the primary source of funding for this program, could come under pressure if younger folks don’t or can’t work, adding another layer of risk to a downturn in the jobs market for seniors. Even those who may not have worked for years may be impacted by a serious recession.

The good news is that policymakers and the Federal Reserve will likely take their job seriously in attempting to encourage maximum employment. The bad news is that these demographic shifts may pressure the SSA to enact more drastic measures in relatively short order to ensure payouts can continue in some form to seniors.

Currently, the OASDI program can rely on its $2.89 trillion trust fund to meet obligations. But it’s also true that this support will diminish once reserves are depleted, compromising the ability to pay full benefits.

One policy option to tackle the funding shortfall involved raising the full retirement age or the earliest eligibility age for benefits. This approach aimed to address the demographic factors contributing to the imbalance between program costs and income. While raising retirement ages could enhance the program’s long-term financial health, it would not alone prevent the depletion of trust funds. 

This is something concerning not only baby boomers but those in the Gen X and Millennial generations – if social security, something these folks are paying into with their paychecks – won’t be there, that would really be a terrible thing.