This is a very important question when deciding when to take your Social Security benefits and no one know the exact answer to this so let’s look at a few facts to consider to help provide some clarity on this issue.
The overall consensus it that the Social Security Trust Fund will run out of money in the year 2034 which at the time of this writing is only 17 years away. This sounds pretty ominous doesn’t it, and many of you that are coming into retirement figure that you hopefully have more years then that. So what is causing the Trust Fund to become insolvent anyway?
Let’s take a quick look at how Social Security is funded to get a picture. The FICA taxes (Federal Insurance Contributions Act) that are taken out of each person’s paycheck, or taxed to you if your self employed currently are 12.4% up to the maximum amount of $118,000. If your employed your employer pays half of this and if your self employed you pay all of it.
The Social Security Trust Fund is a pay-as-you-go system. FICA tax revenue funds current Social Security and any money that isn’t paid out each year is held in the Social Security Trust Fund and is invested in government bonds. The money you pay in isn’t set aside just for you but instead is being used to fund the entire system, either paying out current benefits or going into the Trust Fund as surplus revenue. Currently there is a surplus in the Trust Fund from the large segment of baby boomers paying into the system over the years.
Here’s the current predicament; there are more retirees today then ever before and this number will be increasing, while at the same time the working age population is getting smaller. Today the working age population is currently at about 60% of the overall population, and this percentage will be declining in the future, It is estimated that in the year 2034 the Trust Fund will be exhausted and there will only be about 77% of the funds needed to fund Social Security at the current levels. So if your 66 today then at age 83 you may see a reduced benefit of some type.
So what are some of the changes we might expect to fix this problem? There are many reforms that are being considered, such as increasing the amount that is subject to FICA tax for wage earners. Another proposal is upping the future age to receive Social Security payments. Currently those born between 1943-1954 the full retirement age is 66 and those born 1960 or later the age is 67. Years between 1954 and 1960, the full retirement age is 66 and a few months depending on the exact year.
Other options to offset the shortfall for Social Security funding are to reduce future increases, apply a means test so higher net worth retirees may have reduced benefits, or simply cutting benefits for all retirees. Whatever the case it certainly is something to keep a eye on.
So should you file earlier if your future benefits may be reduced? It certainly is a consideration and if your on the fence regarding this decision then this may be a valid reason to take benefits earlier. For others you may have the confidence that the government will make the necessary changes to offset the future shortfall. No one knows the answer to this so you will have to make your own decision, so as the old saying goes do you take the bird in the hand or two in the bush?