Retirement and Social Security Insolvency: How to Prepare
There's little doubt that the U.S. Social Security system is broken. According to the Congressional Budget Office, annual outlays for the program have exceeded annual revenues since 2010. The government expects that the two Social Security trust funds would be exhausted by 2031, and once they've been depleted, the Social Security Administration would no longer have the legal authority of pay full benefits when they are due. In this article, we'll take a look at some proposed solutions to the problem and what Americans can do in order to prepare for a post-Social Security retirement.Redesigning Social Security
There is no shortage of ideas for solving the Social Security system, but there is a lack of political consensus to make it happen. The most obvious solution to the Social Security problem is to simply raise taxes in order to support the system. Of course, raising taxes is politically difficult since it directly impacts taxpayers' disposable incomes. Raising the payroll tax gap could help substantially reduce the deficit – by taxing high-income individuals with more payroll taxes – but would risk alienating many wealthier Americans that tend to have a lot of political sway. (For more, see: Can Young Workers Rely on Social Security?)
A second solution would be raising the retirement age in order to reduce the cost of Social Security, but this solution is nearly as politically difficult as raising taxes. In addition, the elderly are among the most active voters and have strong support from the AARP and other groups. Raising the retirement age would also have a relatively limited impact and additional solutions would still be needed in order to fix the broken system.
Others believe that the Social Security program should be scrapped entirely and replaced with a private saving vehicle. While the Obama Administration's myRA represents a move in this direction, initiatives like the Purple Social Security Plan would create mandated retirement accounts for individuals that would be fully funded and improve work incentives. These types of overhauls could put the entire system on more solid footing moving forward. (For more, see: The Devil in the Details: Five Retirement Budget Proposals.)Don't Rely on Social Security
The fate of Social Security remains in limbo over the long-run, which means that younger Americans shouldn't rely on the program when saving for retirement. Social security was never intended to be a sole of retirement income. According to the Social Security Administration, the program replaces about 40% of an average worker's income after retiring and most financial advisors recommend 70% or more of pre-retirement earnings in order to live comfortably. Retirees need private pensions, savings, and investments in addition to Social Security in order to retire comfortably.
Most Americans who plan on retiring after 2031 shouldn't rely on Social Security income when planning for their retirement, while those retiring early may only want to rely on a portion of their anticipated Social Security benefit. For example, a person retiring in 2025 may only plan on receiving half or three-quarters of their Social Security benefit in retirement, while someone planning on retiring in 2035 may not anticipant any benefits at all in their planning. (For more, see: 10 Common Questions About Social Security.)
There are many different ways to save without planning on Social Security income, including private pensions, sponsored 401(k) plans, individual retirement accounts (IRAs), and the government's newly launched myRA account. Often times, employers provide the most attractive retirement saving options with their matching contributions, although Roth IRAs should also be considered for their tax-saving attributes.The Bottom Line
The Congressional Budget Office has made it clear that the Social Security system is broken and could run out of money by 2031. While there are many different plans that could save or refactor the system, Americans who aren't retiring before 2030 shouldn't count on any Social Security income for their retirement years. The good news is that these individuals have plenty of time to save through pensions, 401(k)s, IRAs, and other retirement accounts. (For more, see: 5 Social Security Alternatives.)