The United States’ Social Security system not only provides retirement benefits, but also provides disability and survivor benefits to covered workers and their families. The Social Security system receives funding from numerous sources, including the Social Security payroll tax (FICA) on wages, self-employment tax on the income of self-employed individuals, income tax on the taxable part of Social Security benefits, and interest on current trust fund assets.
The subject of Social Security funds running out comes up over and over again, and Congress keeps kicking it down the road. It’s all politics; lawmakers do not want to deal with the political fallout that will result if taxes are increased or benefits are reduced to fund future Social Security benefits. The last change Congress made was to gradually extend the full retirement age from the age of 65 to the age of 67 between 2002 and 2025 – but more needs to be done if future Americans want the same benefits as previous generations.
In the Social Security Administration’s 2013 Annual Report, the Board of Trustees projected trust fund exhaustion by the year 2033. It also projected that in 2033, the first year of projected insolvency, the program would only have enough tax revenues to pay about 77% of scheduled benefits. That percentage would decline to 72% in 2087. If that happens, the monthly payment of benefits could be delayed, disrupting the predictability of the current payment schedule.
A recent study by the Congressional Research Service (CRS) concluded that the sooner Congress acts, the smaller the changes to Social Security need to be. Making changes now would spread the costs over a larger number of workers, and over a longer period of time. Changes could be slowly phased in, rather than making abrupt cuts in benefits and/or increases in taxes, thus allowing workers to plan in advance for their retirements. However, the average life span keeps increasing as technology and medicine advances, so people are retired and living longer and longer on Social Security.
All of this means relying solely on government benefits for retirement is risky. Proactive retirement plans may be a better option for those golden years. The current tax code provides for numerous retirement incentives including Traditional IRAs, Roth IRAs, 401(k) plans, self-employed retirement plans, and a Saver’s Tax credit for lower income individuals. A little saved each year can become a significant retirement income source in the future. If you would like assistance planning for your retirement, or explain the various tax-favored retirement plans available, please contact Dagley & Co.
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