Millions of retirees depend on Social Security as their main source of income, even though the benefits are not very great. Sadly, current and future retirees with this money may receive an unpleasant surprise in the next decade: Cuts in Social Security benefits may be coming.
While the most recent report from Social Security trustees indicates that the trust fund will run out of money in 2035, which will require a 24% cut in retirement benefits, there is a very good chance that the funds will fall short. before that, and the cuts will have to happen sooner. Here are five key reasons why that is the case.
Image source: Getty Images.
1. Reduction of payroll tax collection
Coronavirus-related business closings have left a record number of Americans without jobs. Even with data from May and June showing that jobs were added, the unemployment rate is still 11.1%.
That’s not a good thing, and if coronavirus cases continue to rise, things could get worse. Unfortunately, with fewer people working, Social Security collects less payroll tax revenue. And a provision in the CARES Act that allows employers to delay paying these taxes only serves to exacerbate the situation.
Since payroll taxes are a major source of Social Security income, reducing tax collections could mean big financial problems will soon arise.
2. Higher income retirees can pay less tax on benefits
Taxes paid on benefits are another important source of income for Social Security. About half of all beneficiaries pay them in a normal year, and some older people with higher incomes pay taxes on up to 85% of their benefits.
However, in 2020, there may be fewer retirees paying taxes, and the amount raised may be less. This is because benefits are not taxable until single retirees have countable income of at least $ 25,000 and married joint filers have countable income of at least $ 32,000. Countable income equals half of Social Security benefits plus other taxable income, and that “other” taxable income could be much lower this year for a number of seniors for countless reasons, including:
If less income is earned from income taxes, the trust fund is further depleted of income, putting future profits at risk.
3. The trust fund will earn less interest
The Federal Reserve has set benchmark interest rates close to zero and promised that they will remain there until 2022.
This affects the interest that Social Security can earn in the trust fund, which by law must be invested in special issue treasury bonds. The rate on those bonds had steadily declined from 2007 to 2018 and could fall again, threatening another key source of income for Social Security.
4. Lower inflation could reduce long-term tax collection
By severely depressing economic activity, the coronavirus is likely to exert downward pressure on prices, likely to cause weak inflation or even deflation. Unfortunately, when wage growth is suppressed due to a prolonged period of low inflation, Social Security payroll tax revenue drops again.
While Social Security costs also decrease during periods of low inflation because cost-of-living adjustments (COLAs) are reduced and workers have a lower average salary on which benefits are based, the reduction in earnings It may not fully offset the costs of reducing tax collection – especially since COLAs are not really an accurate measure of inflation and the average wage is calculated over the 35 years that workers earn more.
5. Reducing immigration further depletes income
The Trump administration has imposed new immigration restrictions in response to the coronavirus. The regulations, along with a poor economy and increased risks associated with relocation, will likely result in a significant drop in the number of people who come to the United States to live and work.
Unfortunately, Social Security is based on legal immigration, as migrant workers tend to be younger and pay in the benefits system for a long time. With the drop in birth rates, immigrant workers are also needed to help avoid a reduction in the worker-beneficiary relationship, which will only deepen the program’s financial problems.
Don’t get caught unprepared if your profits are reduced
A 24% cut in benefits would be an economic and political disaster, and probably won’t happen. But that doesn’t mean you can count on receiving all your benefits. If lawmakers come up with a compromise solution that tightens the program’s finances, it will likely involve at least some kind of reduction in the size of checks that future retirees receive.
Since the benefits are already too small to be your sole source of retirement income, you will need even more additional savings to ensure your financial security in your later years.
You must be aggressive in setting your retirement goals and aim to save around 15-20% of income over the course of your career to be prepared. That will require a careful budget, but it will be worth it when you are financially ready for retirement, even if your Social Security benefit is a little smaller than you expected.
