What does Social Security insolvency mean, and how can it impact your retirement?

In the last several months you may have seen news headlines announcing that the Social Security program will be insolvent by 2033. This could be alarming if you’re planning to retire, but it doesn’t necessarily have to be. While news of Social Security’s potential lack of funding is a real concern, it’s important to remember that “insolvent” is not the same as “bankrupt.” In this case it means that there is not enough money available to meet all of the program’s obligations. If nothing is done to fund the system at current levels, it is estimated that the program will be able to pay only 76% of what is owed to retirees beginning in 2034.

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How did we get here? This news has been a long time coming and not a surprise to those who understand how the system works. It’s simply about demographics. The Social Security system relies on the payroll taxes from those working today to pay for the benefits of those retired tomorrow. However, as the baby boomer generation continues to retire and leave the workforce in large numbers, the need for benefits outweighs the amount being contributed. The COVID-19 pandemic, which increased the number of workers without jobs, also affected the insolvency date, pushing it up by a year. While the issue of Social Security insolvency will be a major political issue, likely one that will require action from Congress, there are things that people preparing for retirement should know in order to better plan for the future. 

Potential changes to the Social Security program

As Congress considers how to continue funding Social Security there are potential changes to the program that could affect when and how you receive benefits. A few that could be implemented include:

  • An increase to the payroll tax. Currently, the payroll tax funds Social Security so as more money is needed for the program, a tax increase is possible.

  • An increase to the earnings limit for payroll taxation. Currently, the maximum earnings that can be taxed for social security is $142,800. Lifting this ceiling would generate more revenue for the system.

  • An increase in the retirement age for benefits. For those born in 1960 or later the minimum retirement age is 62 and the full retirement age is 67. Increasing those ages would delay the payout of benefits and also keep many workers contributing to the system longer.

  • Means tested benefit payouts. The most controversial of options would create a sliding scale of benefits, with people who earn more while working receiving less from Social Security once they retire.

How to adjust your retirement plans

Even when fully funded, Social Security benefits only make up a portion of a retiree’s monthly income. Which, while important, means most of us will need to plan to have other income sources. For anyone retiring before 2033, it is unlikely that benefits will change. For those retiring after, there are things that can be done now to ensure you have the money necessary to live the life you want. 

The first step in planning for a change in Social Security benefits is understanding what those potential benefits could be. By visiting SSA.gov and creating an account you can determine what your benefit payments will be at your minimum, full and maximum retirement ages, at current program levels. Understanding how much you could receive will help guide how much you may need to save through other avenues. 

Second, take a serious assessment of your current expenses, and evaluate how they will be handled in retirement. Will some expenses, like healthcare costs, increase? Will others, like housing costs, decrease? Assess what your current lifestyle is, and how you want to spend your retirement years, so you can compare your potential costs with what you have saved. 

Finally, meet with a retirement planning professional. They can help you to estimate your likely monthly expenses in retirement and determine how much of a shortfall there could be between your estimated benefits and expenses. They can also help you evaluate your current retirement strategy and provide income projections on your current retirement accounts. All of this data could help you determine whether you could benefit from a fixed annuity or other financial planning option. 

While 2033 is not that far away, you do have some time to plan ahead. Online resources and financial professionals can be of help. Take advantage and convert confusion into confidence when it comes to your retirement.


Paul Garafoli is regional sales director of individual annuities at The Standard, which provides insurance products, including retirement plan services and annuities.

Roy Walsh

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