Who’s Ready for a $5,814 Social Security Benefit Cut?

For the vast majority of current and future retirees, social security income is indispensable. A recent poll by national pollster Gallup found that 89% of current retirees rely on their monthly Social Security payment to varying degrees to make ends meet. Meanwhile, 84% of non-retirees plan to rely on the program as their “main” or “minor” source of income during their golden years.

Unfortunately, America’s most vital social program is in a lot of trouble.

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The average retired worker could lose over $ 5,800 annually over 12 years

Every year for more than eight decades, the Social Security Board of Trustees has published a lengthy annual report that examines the inner workings of America’s leading social program. It provides data on revenue collection and benefit payments since the inception of Social Security, as well as making numerous predictions on the direction of the program over the next 10 years (short-term) and 75 years (long-term).

Since 1985, the Board of Trustees report has warned that the combination of Old-Age and Survivors Insurance Trust (OASI) and Disability Insurance Trust (DI) would not generate sufficient aggregate revenue to maintain existing payments, including annual cost adjustments. life (COLA), long-term. This expected liquidity shortage has grown steadily, on a nominal dollar basis, over the past three or more decades.

If there is a positive side to this, it is that Social Security is not in danger of going bankrupt or becoming insolvent. The lion’s share of the revenue raised by the social security program comes from the 12.4% payroll tax on earned income (wages and salaries, but not investment income). As long as Americans continue to work, the income will always flow into Social Security for disbursement to eligible beneficiaries. If you qualify for a Social Security benefit, you will receive some form of payment.

However, should things continue on the path they have now, the Board of Trustees estimated that by 2034 a cut of up to 23% in AHV benefits may be needed to support payments through 2096 without further reductions. The OASI is what provides a monthly social security allowance to 48 million retired workers.

What would a 23% benefit reduction actually look like by 2034? If we assume that COLA grows by an average of 2% annually through 2034, the average pension benefit would increase from $ 1,661 per month to start 2022 to about $ 2,107 per month by 2034. If you are wondering why I chose a 2% cost – of life adjustment, has to do with the Federal Reserve aiming at that rate for long-term inflation. If OASI’s capital reserves (excess revenue collected from the start) were to run out by 2034, as predicted by the Board of Trustees, the average retired worker would lose $ 484.51 in monthly income, or $ 5,814 over the entire year.

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Demographic changes are creating all sorts of problems for social security

With the combination of OASI and DI hitting an all-time high of around $ 2.9 trillion in asset reserves in 2020, you may be wondering how Social Security itself is in such a situation. The answer lies in a series of demographic changes that are harming the program’s revenue-generating ability or increasing disbursements.

For example, most people are probably well aware that baby boomers have been retiring in greater numbers for years. While these folks hang up their work coats and retire, there simply haven’t been enough new workers to take their places. When the worker / beneficiary ratio decreases, it puts a strain on social security.

What you may not realize is that historically low birth rates are on track to have the same effect over a longer period. In 2020, the approximately 3.6 million babies born was the lowest figure in over four decades. Furthermore, fertility rates in the United States – the expected number of children a woman will have in her lifetime – have reached an all-time low in 2020. With birth rates not close to generational turnover levels, the worker / beneficiary ratio it seems destined to fall even more.

To build on this, immigration is another issue for Social Security, albeit not for the reasons you may have heard. The financial well-being of the program depends on a good amount of legal immigration to the United States each year. Immigrants tend to be younger, which means they will spend decades in the workforce contributing to social security through payroll tax. Over the past quarter century, legal immigration to the United States over a five-year period has been nearly halved.

Income inequality is also a problem. About 94% of working Americans pay Social Security with every dollar they earn. This is because, in 2022, all income earned between $ 0.01 and $ 147,000 is subject to payroll tax. But for the remaining 6% of affluent workers, earned income above $ 147,000 is exempt from payroll tax of 12.4% in 2022. That’s well over $ 1 trillion in earnings that escape payroll tax. .

Expect a long wait before lawmakers address social security shortcomings

Another concern that has not yet been touched is that lawmakers are not the fastest when it comes to addressing social security shortcomings.

For example, the program was facing depletion of its capital reserves in 1983, similar to what was predicted by 2034 for the OASI, or by 2035 for the OASI and DI Trust combined. It had been known for years that Social Security would deplete its capital reserves and demand benefit cuts if lawmakers didn’t take action. It took until 1983 (the same year that reserves of assets were estimated to have run out) for the Reagan administration to approve the latest truly radical bipartisan overhaul of the program. In other words, history would suggest that it will take at least a decade before Congress is forced to act.

It also doesn’t help that Democrats and Republicans aren’t forced to work with their opposition. Since both sides have come up with their own workable solutions to “fix” social security and strengthen the program, neither side has an incentive to find common ground.

Although social security want being there for you, whether you are already retired or just entering the world of work for the first time, is more important than ever to invest in your future. The last thing you want is to put your trust in lawmakers and hope they act quickly enough to avoid a potential 23% cut in Social Security benefits.

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