AMERICANS fear that the Social Security system is at risk of going broke due to concerning financial insolvency projections, but the solution may be in young workers.
In order to save the longstanding safety program, those newly entering the workforce may just be hit with a tax nightmare that would drain their bank accounts by over $100,000.
The Social Security program is facing an insolvency crisis[/caption]
Young workers may be hit with a tax nightmare in order to save Social Security[/caption]
Social Security was established on August 14, 1935, when the Social Security Act was signed into law by Franklin D. Roosevelt, with the federal program celebrating its 90th anniversary on Thursday.
However, the social insurance program that helps tens of millions of Americans each year is less than 10 years away from insolvency, according to projections from Social Security’s trustees.
The insolvency concerns are partially due to the fact that the ratio of working Americans to retired Americans has dropped over time.
While there were 16.5 workers per retiree in 1950, this number declined to 3.3 workers in 1985 and roughly 2.8 workers in 2013, according to SSA data.
Once Social Security’s two main trust funds are depleted, benefits would likely be reduced by law to a level that can be sustained by ongoing payroll tax revenue, unless Congress reforms the program.
Should the federal program reach insolvency, Americans would see their Social Security benefits slashed by an average of 24%, per an analysis by the Committee for a Responsible Federal Budget.
Congress would have to immediately and permanently increase payroll taxes by 3.65% – a jump from 12.4% to 16.05% – to close the Social Security’s 75-year funding shortfall, per estimates from the program’s trustees.
Such a dramatic tax increase would put a heavy burden on young workers, according to an analysis by Romina Boccia, Cato Institute’s director of budget and entitlement policy.
For a hypothetical median American joining the workforce at 22 this year, the tax spike would deplete their lifetime earnings by more than $110,000 over 45 years of work, per the Cato analysis.
This amounts to giving up around 20 months worth of pay at the worker’s average monthly income.
This hypothetical American worker is symbolic of an average employee making a little under $70,000 annually, Boccia said in an interview with Fox Business.
“They already face quite a high burden from the payroll tax – on an annual basis, they currently pay more than $8,000 a year on their less than $70,000 income just for Social Security,” she said.
“If we had to raise payroll taxes to avoid any benefit reductions, they would pay over $10,000 a year just for Social Security” to keep the federal program solvent for 75 years, said Boccia, emphasizing that it would be a “significant increase in the tax burden” for these Americans.
“Think about what $2,000 or $3,000 a year buys – for some people, this is their annual grocery budget, for others it might be a car payment,” she said.
HOW TO SUPPLEMENT YOUR SOCIAL SECURITY
Here’s how to supplement your Social Security:
Given the uncertainty surrounding Social Security’s long-term future, it’s essential for workers to consider ways to supplement their retirement income.
Senior Citizens League executive director, Shannon Benton recommends starting early with savings and investing in retirement accounts like 401(k)s or IRAs.
- 401(k) Plans
- A 401(k) is a retirement account offered through employers, where contributions are tax-deferred.
- Many employers also match employee contributions, typically between 2% and 4% of salary, making it a valuable tool for building retirement savings.
- Maxing out your 401(k) contributions, especially if your employer offers a match, should be a priority.
- IRAs
- An Individual Retirement Account (IRA) offers another avenue for retirement savings.
- Unlike a 401(k), an IRA isn’t tied to your employer, giving you more flexibility in your investment choices.
- Contributions to traditional IRAs are tax-deductible, and the funds grow tax-free until they are withdrawn, at which point they are taxed as income.
SOCIAL SECURITY STRUGGLE
The program’s two main trust funds are expected to become insolvent in the next few years.
This means that they will not have enough money to pay 100% of the benefits scheduled under current law.
Social Security’s Old-Age and Survivors Insurance, or OASI, trust fund, which hands out survivor and retirement benefits, will reach insolvency in 2033, per projections in the latest Social Security Trustees’ Report.
Once insolvent, estimates say that the OASI trust fund will only be able to pay roughly 77% of scheduled benefits.
If combined with the Disability Insurance, or DI, trust fund, the combined trust funds are projected to be depleted in 2034.
Some analyses suggest slightly earlier insolvency dates and even deeper benefit cuts.
Combatting the insolvency crisis would call for Congress to immediately raise payroll taxes by nearly 4%, but some experts have said they don’t view this as realistic.
“It would be incredibly economically destructive because of the extremely high marginal tax rates that it would impose on, say, small business owners, for example, where you would be at a level of taxation where you would actually collect less in taxes at a higher rate,” Boccia told Fox Business.
She explained that the Laffer Curve effect would play a part, with the higher taxes “affecting incentives so measurably that people will work less and try to avoid that punitive level of tax states.”
Boccia noted that the effect would especially take hold in states such as California and New York where taxes are already high.
As the SSA grapples with its insolvency concerns, the federal agency has other major changes in the works.
For example, Social Security’s little-known “family” rule change may slash benefits for nearly 400,000 needy seniors.
Plus, your Social Security claim will be approved faster as the agency adds a brand new “fast track list.”
Congress could permanently increase payroll taxes in an effort to fix the insolvency crisis[/caption]
