The latest Social Security Trustees Report sounded the alarm that Social Security Disability program's trust fund was on track to run out of money this year. If that fund were to be allowed to empty, it would slash Social Security Disability benefit payments to about 81% of current levels. Given that the average recipient gets $1,166 per month, that cut would knock the typical monthly benefit down to just under $945.
To stave off an election year fight on the issue, lawmakers passed a temporary patch last year that kicked the can down the road. For 2016, 2017, and 2018, they shifted some of the Social Security payroll tax away from the Retirement program and to the Disability program. That move is expected to stave off the day of reckoning for Social Security Disability until 2022. It's a temporary fix, but it comes with very real costs for you as a taxpayer and a potential Social Security recipient.
Two ways you're paying for that bandage
That temporary fix hits you twice. First, it's a "rob Peter to pay Paul" strategy, in that the money to cover Social Security Disability's shortfall comes directly out of taxes that would otherwise be headed for the Social Security Retirement Trust Fund. The shift hastens the date where Social Security Retirement also would be forced to cut benefits because of insufficient funding.
If you assume that lawmakers will continue to shift money from the Retirement Trust Fund to the Disability Trust fund, their combined balance is expected to run out in 2034. Granted, without the shift, the Retirement Trust Fund is still expected to run out in 2035, so it's only hastening the run dry date for the retirement plan by around a year.
Still, that brings us to the second way you're paying for the bandage. According to the Congressional Research Service, the sooner changes are made to truly shore up the system, the less painful they would be. As a result, because this patch does absolutely nothing to address the long term structural problems facing Social Security, it assures that any ultimate fixes will be more expensive and painful.
What you can do about it
This isn't the first time Social Security has faced long-term structural challenges. If history is any guide, when lawmakers do make the next round of long-term fixes to it, those fixes will come at a cost. That cost will likely involve some combination of higher taxes and lower benefits. As a result, one of the best things you can do to prepare for it is to manage your money as though those changes will happen right now, even though they might actually take place several years down the road.
If taxes go up¸ then your take home from your paycheck will be smaller in the future than it is today, as a result of the tax increase. If you start saving and investing around that now, then the pain from that future tax hike will be reduced. After all, it's easier to simply save less than it is to cut something from your lifestyle to cover for the costs of higher taxes. Additionally, any money you save in the interim can help you cover some of your future costs once you discover your smaller paycheck doesn't go as far.
If benefits get cut, then your take home from your future Social Security checks will be smaller than what you're currently promised by the program. If you start saving and investing now, then you can build up more of a nest egg to cover the missing part of those future benefits. Alternatively, unfortunately, your other option would be to simply accept those benefit cuts and live on less in retirement or if you should become disabled.
Your key course of action
So yes, regardless of the future of Social Security or how its issues get structurally addressed, the most important thing you can do is save and invest to cover the costs of its future changes. If you look back over the Social Security's history and up through this most recent temporary bandage, fixes to the program come at a very real cost. If you prepare for those costs now, you will be ready for them when they do come to pass, and thus be in a better spot to truly benefit from the fix itself.
Chuck Saletta has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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