You have likely heard that the Social Security fund is projected to run out of money around 2035. With that deadline only 15 years away it is likely to impact everyone who is not already enrolled in Social Security as well as many who are. What will happen when the fund runs out? You may have heard that benefits will stop being paid once the fund runs out, but that is not likely to happen. We have laid out some of the changes that are likely to be made to Social Security, over the next 15 years or after the fund runs out around 2035.
If no changes are made before the fund runs out, the most likely result will be a reduction in the benefits that are paid out. If the only funds available to Social Security in 2035 are the current wage taxes being paid in, the administration would still be able to pay around 75% of promised benefits. While a 25% reduction in benefits could significantly hurt the retirement plans of those who are relying on their Social Security benefits, it is far less damaging then the program being shut down entirely.
With the potential for benefits to be reduced, some retirees may be tempted to apply for their benefits early to receive as much as they can before the fund runs out. However, if you start taking your benefits as soon as allowed, they will be reduced to 70% of your full-retirement age benefit. Comparing this to the 75% that could be received even after the fund runs out, you would still be hurting your retirement by applying early.
Increased Wage Taxes
To avoid benefit reductions, congress may vote to increase the Social Security taxes charged on employee wages. If the increase were put in place immediately, the employee portion of the tax would need to increase from 6.2% to 7.55%. This would represent an additional $675 in taxes paid annually for an employee making $50,000 per year.
If the increase is not put in place until 2035 the employee portion would need to increase to 8.025%, representing an annual tax increase of $912 for an employee making $50,000.
Increased Full Retirement Age
Even if the fund does not run out, the full retirement age needed to receive your full Social Security benefit is likely to go up in the future as life expectancies increase. Since the Social Security program was first started the average life expectancy has increased 7 years and yet the full age retirement for Social Security has only increased 2 years. As the fund begins to run out, it is likely that the full retirement age will be raised even further, along with harsher benefit cuts for those who apply early.
While Social Security benefits are unlikely to be completely eliminated 15 years from now, there is a strong possibility that they will be reduced significantly if revenues are not increased in the next few years. To make sure that your retirement plan is secure, you should analyze your retirement income stream under the assumption that your Social Security benefits will be reduced and determine what changes need to be made if that happens.