The Future of Your Social Security – Four Potential Roadblocks Sponsored By:Brad Furges

In a perfect world, you’ll leave the world of work and enjoy the Social Security benefits to supplement a long, healthy, and enjoyable retirement. Unfortunately, this isn’t a perfect world, and we’re surrounded by all sorts of rumors and stories about the health of Social Security. Even if it won’t completely disappear, this doesn’t stop you from having concerns about the whole process. 

 

While some problems already have solutions, there’s nothing to say that more future changes won’t affect your Social Security. Here are four examples: 

 

Percentage Income Replacement 

 

In recent times, we’ve seen stories of a change to the calculation of benefits. For example, one system would reduce potential monthly benefits. With Social Security income replacement, the name gives it away, but the idea is to replace a percentage of income depending on what one earned while working. While high earners will have a smaller percentage replaced, low earners will have a larger percentage replaced. 

 

If this change were to come into effect, it could mean a need for more savings regardless of how much income Social Security replaces. Therefore, it’s critical to review your budget and stop all unnecessary spending as early as possible. Also, consider taking on a part-time job and sending as much as possible towards a retirement savings account. 

 

Higher FRA

 

Considering the change in life expectancy, it’s fair to say that the full retirement age hasn’t kept up. While the FRA in 1935, at the formation of Social Security, was 65, it’s still now only between 66 and 67 (depending on your date of birth). To put this small change into perspective, life expectancy has grown by about 20 years over the same period. The more it keeps increasing, and the more the FRA remains low, the more payments your Social Security savings need to cover. 

 

The Social Security Administration has been open about potential shortfalls, and one potential solution is to increase the FRA once again. What would this mean for you? Well, you may have to plan to work longer. Alternatively, delay taking Social Security so that you benefit from the boost in monthly benefits. If you take your Social Security payments early, you’ll permanently reduce the amount. 

 

Either way, the key to success is planning. If the FRA were to increase, how would you adapt your retirement strategy to account for this change? 

 

COLA Recalculation 

 

Every year, the cost-of-living increases, and the Social Security Administration has built a cost-of-living adjustment (COLA) increase into benefits to account for this. In other words, recipients see their monthly benefits slightly increase each year. While this feature probably won’t disappear, it’s worth considering what happens if the annual increase were to be reduced. 

 

This year, the COLA was half the inflation rate in the United States – 1.3% compared to 2.6%. The more this gap grows, the more likely it is that the rise in the cost of goods will overtake the rise in your Social Security monthly benefit. Therefore, it becomes harder and harder to maintain the same standard of living as your retirement progresses. 

 

How do you counter this? How do you deal with this sort of change? One of the best ways is to ensure that a small percentage of your retirement portfolio remains invested in stocks. Although the risk is higher with stock investments, they also have a higher return rate. With sensible investments, your retirement income should outgrow inflation and prevent the issue mentioned above. 

 

Penalty for High-Income Retirees

 

Finally, the Social Security Administration could also introduce a benefit reduction for the highest earners. By introducing a change this way, the highest earners are hit first and take the brunt of the blow, thus saving those further down the chain who rely on Social Security for a larger percentage of overall income. 

 

Naturally, one of the biggest issues with this potential system is the definition of ‘high-income retirees.’ Where do you draw the line? Will it affect the top 10%? Will it impact the top 50%? If you earn over $68,000, you fall into the latter category. If you earn over $123,000, you’re in the top 25% of all Americans. 

 

If this were to happen, one step is to send all excess money to a savings account to position yourself better for the reduced Social Security payment. What if you’re already saving as much as possible? In that case, look for alternatives such as company matches. This way, you increase contributions without actually spending more money yourself. 

 

Conclusion 

 

These are just four potential changes that you may face with Social Security in the future, and you now have some advice on how to deal with each. Although Social Security shouldn’t disappear entirely, it may be forced into drastic changes to survive. The more preparation you do in advance, the less it will hurt you later. If necessary, speak with a financial professional for more tailored advice!