by Leah Woodly
With the state of the economy, there are many concerns regarding the sustainability of Social Security. We've had countless nurses and other health care professionals tell us that they don't believe they can count on Social Security when they retire. The Social Security debate has been going on for decades, and while the pandemic showed us that anything can happen, we believe Social Security is here to stay.
Social Security is a social insurance program administered by the United States government to provide a variety of benefits, with the most popular being disability insurance and retirement benefits. Most U.S. workers contribute 6.2% of their salaries to Social Security through a payroll tax called Old-Age, Survivors, and Disability Insurance (OASDI). Their employers also pay the 6.2% tax, as well. This tax is limited to the first $160,200 of an individual’s earnings for 20231.
Social Security funds collected through OASDI tax are paid out to those who qualify for Social Security benefits. All unused funds accrue in Social Security trust funds. There is a simultaneous in and out of funds as workers earn wages. In order for Social Security to completely go away, our workforce would have to go away. The likelihood of that occurring is slim.
As I stated in an article for GoBankingRates.com2, I believe Social Security will look different down the line, perhaps for Millennials and subsequent generations. Right now, Social Security retirement benefits receive a permanent increase at a rate of 8% per year that a person delay claiming their benefits past their full retirement age. Additionally, there is a cost-of-living adjustment (COLA) to help curb the impact of inflation on retirement benefits. The latest COLA was a whopping 8.7%3, calculated based on the Bureau of Labor Statistics’ Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
For future generations, modifications may need to be made to the COLA and delayed benefit increases. Millennials and subsequent generations may see less than an 8% increase in benefits for waiting to claim past full retirement age. Furthermore, the calculation used to determine the cost-of-living adjustment may need to be reconfigured to be closer in alignment with inflation. Reducing these increases will augment the availability of funds to be paid out in Social Security benefits.
Another adjustment that may be made to the Social Security system is the full retirement age. Right now, the full retirement age ranges from 66 to 67, depending on your year of birth. In 1983, an overhaul of Social Security created a gradual increase of the full retirement age, so now anyone born after 1960 is not eligible to claim their full Social Security retirement benefit until age 67. According to the CDC, the average life expectancy in the United States was 74.6 years4 back in 1980 The average life expectancy in the United States today is 76.4 years5. With an increase in the expected life expectancy, the full retirement age may be pushed back incrementally to age 68 or later if there is another Social Security overhaul.
Last, but not least, is taxation. Retirement benefit recipients currently pay taxes on up to 85% of their benefits. If you are single, head of household, married filing separately and living apart from your spouse for an entire year or more and have income of more than $25,000, you will pay tax on your Social Security benefits. If you are married filing jointly and earn more than $32,000 in income, you will pay tax on your Social Security retirement benefit income. If you file separately from your spouse, though you have lived together for any time during the year and have earned any income, you will pay taxes on your Social Security retirement benefit income.
In the future, the base income amount for taxation may be reduced so that more recipients pay taxes on their Social Security retirement benefit income. Furthermore, perhaps future generations will see taxation on a greater percentage of their benefits. Instead of it being up to 85%, taxation may occur on 100% of Social Security retirement benefits for some or all participants.
Social Security plays an important role in the retirement plan for many of the clients we serve. For many of the nurses under our group-advisory agreement with the Minnesota Nurses Association, the combination of their pension and Social Security benefit is enough to cover their retirement needs without even needing to touch their retirement savings. Though we anticipate Social Security retirement benefits might change, it plays such a significant role in the retirement plans of our clients, that it should not be discounted. Will Social Security be available when you retire? Most likely. We encourage you to speak to a financial advisor about your specific retirement situation.
To learn more about our group advisory agreements that provide financial planning at no cost to employees, click here.
1 Contribution and Benefit Base (ssa.gov)
2 I'm a Retirement Planning Expert: Here's Why I'm Confident About the Future of Social Security | GOBankingRates
3 Cost-of-Living Adjustment (COLA) Information | SSA
4 Vital Statistics of the United States, 1983: Volume II - Section 6 (cdc.gov)
5 Life Expectancy in the U.S. Dropped for the Second Year in a Row in 2021 (cdc.gov)