It's no big secret that Social Security is unsustainable in its current form. According to the latest Social Security Trustees' report, the Social Security trust funds are expected to be completely depleted by 2034, at which time the incoming payroll taxes will be enough to cover just three-fourths of benefits going forward. So, congress is going to have to do something -- either cut benefits or raise taxes to preserve the program's current state. Here are three reasons we need them to do the latter.
Millions of retirees rely on it
As of March 2016, more than 40 million retired workers collect Social Security benefits, and the average monthly benefit is $1,345. While Social Security isn't intended to be the only source of retirement income for seniors, the majority are at least somewhat reliant on this income. According to a report by the Social Security Administration, nearly two-thirds of seniors count on Social Security for more than half of their income, including over a third who rely on it for virtually all (90% or more) of their income.
And, according to calculations based on Census Bureau data, Social Security income keeps more than 22 million Americans out of retirement. So, it's fair to say that if Social Security were to run out of money and benefit cuts became necessary, millions of American retirees would have to considerably lower their standard of living.
It's inflation-protected retirement income
Unlike many other forms of retirement income -- 401(k) savings, for instance -- Social Security is inflation-protected retirement income. With people living longer lives, having a growing income stream is critical.
For example, let's say that you retire at 65 with $1 million in the bank and invest primarily in fixed-income securities paying 4% interest. So, you receive a $40,000 annual income from your investments. (Note: I don't think this is a good idea -- I've written many times that retirees should stay invested in stocks, but this illustrates my point clearly.)
The problem is what happens 20 years or more down the road. Sure, you'll still be getting $40,000 per year, but $40,000 in 20 years won't be worth what it is today. In fact, at the historical average inflation rate (about 3%), it would only have about $21,750 in purchasing power once you reach age 85. At 95, it would be reduced to just $16,000 in today's dollars.
In contrast, a $1,500 monthly Social Security benefit will increase over time. If inflation spikes to say, 7% next year, the monthly payment will increase accordingly. Your purchasing power stays the same over time, which is critical for retirees, for whom the purchasing power of their retirement savings could decline over time.
It's what the American people want
Perhaps the most compelling reason to save Social Security is that it's what the majority of the American people want.
The National Academy of Social Insurance conducted a survey and found that 77% of Americans believe it is critical to preserve Social Security for future generations, even if it means increasing taxes. And, this includes a majority of Americans of all political affiliations -- it may surprise you to learn that 69% of Republicans are in favor of the previous statement.
Additionally, 86% think Social Security benefits are not enough, and 72% think we should consider increasing benefits for all retirees -- current and future. So, not only do Americans want to preserve Social Security benefits, but they want to increase them and are willing to pay to make it happen.
In fact, the survey determined that Americans' preferred package of Social Security reforms would include the following four changes:
- Eliminate the cap on earning subject to Social Security tax over a period of 10 years. As of 2016, only this first $118,500 in earnings are taxed, so this would represent a tax increase on high earners.
- Gradually (over 20 years) increase the Social Security tax rate from 6.2% to 7.2%.
- Increase the cost-of-living-adjustment to reflect the fact that inflation can be higher for seniors.
- Raise the minimum Social Security benefit so nobody who works for 30 years will retire in poverty.
Not only would the two tax increases fix the current shortfall and pay for the two increases, but they would provide a margin of safety that would start rebuilding the trust funds. This package would be supported by 70% of people across all age groups, income levels, and political affiliations.
What will be done, and what can you do?
The actual Social Security reform that will be adopted by congress is anyone's guess at this point, but I do believe benefit preservation and/or increases are much more likely than cuts. We already mentioned that most Americans are in favor of preserving or increasing Social Security, so consider these individual statistics:
- 80% support gradually eliminating the taxable wage cap
- 83% support gradually raising the tax rate to 7.2%
- 72% support increasing the minimum benefit
- 61% support an across-the-board benefit increase
On the other hand, there is clear opposition to any type of benefit cuts:
- Only 35% support increasing the retirement age to 68
- 25% support increasing it to 70
- 24% support reducing cost-of-living adjustments
The point is that with such bipartisan opposition, any benefit reductions are unlikely to gain any serious political traction. However, depending on who gets elected to congress and to the White House in November, the chances of different reforms taking place can change dramatically.
In the meantime, the best thing you can do is to take a more active role in your retirement planning. By saving a little extra now in an IRA or other retirement account, you can take more control over your financial destiny. Sure, you'll still want Social Security when you retire, but the less reliant you'll be on it, the less you'll have to worry about the politics in the meantime.
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