Easy Money: 4 Social Security Changes to Keep From Running out of Money

This is probably no news to you, we’ve been hearing about it for years. As of right now, Social Security is set to run out of money. Now the nice thing is we are still saving money up until 2022. For the next two years, more money is going into the reserve than what’s coming out. But because there are so many baby boomers retiring, and that wasn’t expected when they set up Social Security, which changes in 2022. In two years we are set to hit $2.92 trillion.

You might say, “Wow, that’s a lot of money,” but not when you’re paying out almost 100 million people in Social Security benefits. So at that point, that 2.92 trillion at current spending starts to go down and by 2026 that number is almost cut in half. By 2034, we are set to be out of money based on current spending in the United States.

Now if costs go up as spending goes up, we could actually run out of money by 2029. So 2034 is actually more of a conservative number. I know 2034 sounds like it’s far away, but it will come sooner than you think. It’s only 14 years from now. If you’re 60 and you’re planning on retiring, that means when you turn 75, Social Security’s bound to be out of money. If you’re 40 or 30 right now, that’s way scarier. So let’s get into the four changes that they can and probably will make to keep social security solvent.

The first one, and probably the most obvious, is full retirement age. When they first set up Social Security back in the ’40s what do you think the full retirement age for Social Security was? It was 65. Now, what do you think the average life expectancy was? It was 65. The federal government basically said, “If you live to this point, we’re going to pay you out forever.” Things have changed. Medicine’s gotten better. The average life expectancy for a 62-year-old is over 84. That’s why this formula no longer works. So they’re probably going to change the full retirement age, in fact, they’ve already done it. It was 65 and, based on your year of birth, it can be all the way up to 67 now. I personally don’t think it’s going to change for somebody who’s about 10 years away from retirement, but for somebody my age, the Millennials, and Generation Z, I really think we’re going to see full retirement age pushed back to about 70-75 years old to try to keep this formula solvent.

The next thing that they can and have changed is inflation adjustments. Social Security currently averages about 2.5-3% in inflation adjustments, give or take a little. We’ve actually seen some years where there were no inflation adjustments on Social Security benefits, but that’s a pretty easy thing to adjust because people get it or they don’t. There’s nothing that they can really do about it. So if the government just said, “We’re no longer going to give inflation adjustments,” that would be a pretty easy way to make Social Security benefits last even longer. Now, what’s the problem with that? Think back to the first year that you worked. If it’s in the ’70s or the ’60s, I bet you that you paid more in taxes this year than you made that first year of working 40-50 years ago. Why? Because of inflation. A healthy economy needs inflation. If there is no inflation, we’re in much bigger trouble than Social Security running out of money. So keep in mind, your retirement plan could be in jeopardy if inflation continues to rise and Social Security decides they’re not going to make adjustments so they avoid running out of money.

Another change that probably will happen is earnings restrictions. What that means is the government can say, “Okay, we’re going to tax you FICA tax, but we’re going to have that FICA tax for all of your earnings, but anything over a certain amount, we’re not going to give you credit for.” They already do that now, but they could decrease it more significantly. So they could say, “Anything over $70,000 we will not give you credit for.” Meaning if you made $700,000 then 90% of what you make and is taxed will not go to you, it will go back into the pool. The $70,000 will be taxed and will go to you. That’s a pretty obvious one that they already have in place and the government can make new adjustments.

The fourth and last change that I think that they probably will make is the actual taxes. The easiest way to think about this is to consider your own life. If you get into debt, what’s the easiest way to get out of debt? Making more money, right? Going out and earning a little bit more. Well, how does a government make more money? They raise taxes. The easiest way to keep Social Security solvent is by raising taxes for people or businesses. Right now, the FICA tax is 7.65% for the employee, 7.65% for the employer. Now if you’re self-employed, you’re paying both (that’s 15.3%). Now they could either say, “Okay, employers, we’re going to make you pay 10,” or “Employees, we’re going to make you pay 10 or maybe both,” right, or higher or lower, whatever it is. That’s probably the easiest way for the government to raise more money, as they’ll obviously be earning more income.

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