In a prosperous future, retirees should be toasting their golden years with drinks that have little umbrellas. Instead, they could be worrying about a vexing question: What happens if Social Security reserves go bust?
Such a scenario could play out within 10 years, if Congress fails to act. Without its intervention, the Social Security Old-Age and Survivors Insurance (OASI) trust fund is projected to run dry by 2033. According to a public policy watchdog group, if that happens, dual-income couples who retire that year could lose between $10,000 and $21,800 in annual benefits.
“Former President Donald Trump and Vice President Kamala Harris have both said they would ‘protect’ the Social Security program. However, neither has put forward a plan to meaningfully do so,” the nonpartisan Committee for a Responsible Federal Budget (CRFB) said in a blog posted Sept. 5.
The CFRB went a step further, noting that Trump “has proposed changes that would worsen the program’s finances.” In July, it contended that his idea to eliminate the partial income taxation of Social Security benefits would actually “increase Social Security’s 75-year shortfall by 25%.”
Arriving at the numbers
To prevent the coming Social Security crisis, Congress will need to take action. Some ways that could help may involve raising the retirement age or collecting more payroll taxes — less-than-thrilling prospects.
When the Social Security Act of 1935 was passed, the life expectancy in America was 59.9 years for men and 63.9 years for women, according to the University of California, Berkeley. Fast forward almost 90 years, and people are living longer: life expectancy is 74.8 years for men and 80.2 years for women, according to the Centers for Disease Control and Prevention. People are living about 25% longer and are retired for many of those years, and the program likely wasn’t originally designed to make payouts for that long.
Yet, lawmakers remain gun shy, knowing that any tweaks to Social Security could lead to voter backlash. As far back as the 1980s, Social Security has been dubbed the third rail of American politics. For generations, it’s been safer, politically, to kick the funding can down the road — though, arguably, it’s a dented can on a dead-end street.
The CRFB splits retirees into three income tiers: low, medium and high. If the OASI trust fund runs out in 2033, the watchdog estimates retiring single-income couples could lose $7,500 per year if they’re low income, $12,400 in the middle range and $16,300 if they have a higher income. Meanwhile, dual-income couples could lose $10,000, $16,500 and $21,800, respectively. The actual size of benefit cuts would vary across retirees depending on age, work history and lifetime incomes.
How to prepare for potential cuts
Leaving your fate up to the whims of politicians is often a foolhardy idea. Here’s how to protect yourself in the event of a Social Security funding nightmare.
Max out your retirement plan: If your projected retirement date is 2033 or later, you’ll have at least nine years to pad your 401(k) or IRA (individual retirement account) to offset any government shortfall. What’s more, starting the year you turn 50, the Internal Revenue Service allows you to contribute a little extra to your retirement accounts. These “catch-up” contributions can be up to $7,500 per year for employer-sponsored plans above the regular limit of $23,000. IRAs allow for a $1,000 catch-up contribution on top of the $7,000 limit.
Map out a money-saving move: Retirement opens up the possibility of relocating to a smaller space and perhaps in a less expensive area of the country. For example, if you can pocket $300,000 in equity for a Chicago home, that’s more than enough to cover the average cost of a house in Milwaukee, which is around $206,000, according to Zillow . Located just 90 miles to the north, Milwaukee, like Chicago, sits on Lake Michigan and has a vibrant cultural scene. But it also boasts a lower cost of living, according to the Economic Policy Institute’s family budget calculator.
Look out for new income streams: If you don’t retire between now and 2033, you’ve still got plenty of time to expand earning possibilities while holding down full- or part-time work. Side hustles can actually be fun and low-stress, if it involves little effort or an activity you enjoy. If you prefer to stick closer to home, renting out a garage, parking space or spare room can also make a major difference to your bottom line.
