You pay dearly for your promised Social Security benefits.
Between your own contribution and your employer's contribution on
your behalf, 12.4% of the first $117,000 of your earned income
gets sent to Uncle Sam as a tax to pay for that program.
Source: Social Security Administration.
Despite that substantial tax rate, the program is in financial
trouble. Its own trustees estimate that by 2033 its trust funds
will empty and it will only be able to pay about 77% of expected
benefits. Those same trustees estimate that it would take a tax
rate of about 17.1% of covered payroll to cover Social Security's
costs in 2035, rising to 18.2% by 2088.
What that means to you
In a nutshell, Social Security's trustees are making it
abundantly clear that the program is
sustainable as is. Without changes, the already expensive
benefits it provides will either become much more expensive to
fund or get cut substantially.
Chances are strong that Social Security will survive but will
look somewhat different from how it does today. If history is any
guide, Congress will likely tinker around the edges with some
combination of tax hikes and benefit cuts in order to shore up
the system. Here are a few past and proposed adjustments that
have affected, or may affect, the program.
Over Social Security's history, total tax rates -- including the
employee and employer parts -- have risen from 2% at its
inception to the current 12.4%. The earned income subject
to Social Security tax has increased as well, to $117,000 from
$3,000 when the program began. Even adjusting for inflation, that
income cap has more than doubled.
A combination of tax hikes and benefit cuts
In 1984, Social Security benefits became subject to income taxes.
Today, up to 85% of your Social Security check can be subject to
income taxes if you have sufficient total income levels. A large
portion of those taxes go to help shore up Social Security's
trust fund, and the rest go to shore up Medicare. In essence,
these taxes cut the net benefits received by many Social Security
While Social Security's benefits are indexed to inflation, there
are serious doubts that the inflation gauge used in that index
truly measures the higher inflation rate
experienced by seniors
. Additionally, there's a proposal that surfaces from time to
time to use a chain-weighted inflation index to slow that
inflation adjustment even further.
What can you do about it?
Remember that even if nothing changes, Social Security is
still on track to pay out about 77% of its expected benefits once
its trust funds empty. It's the other 23% or so that is primarily
at risk. Chances are that the shortfall will be covered by some
combination of tax hikes and benefit cuts, as it has so many
other times in the past when Social Security was at risk of not
meeting its obligations.
With that as the backdrop, you should figure out
your money now to cover the cost of the next patch when it does
get implemented. After all:
If tax rates go up
, it's a lot easier to cut back on investing to cover those
taxes than it is to cut back on your living expenses in
response to a tax hike.
If benefits get cut
, it's a lot better to draw money from your nest egg than it is
to be forced to cut your living expenses in response to a
If some other solution is found
that doesn't either raise taxes or cut benefits, then the money
you save by preparing for those other outcomes remains yours to
The thing about investing, though, is that the more time you
put into it, the better your odds of success. You still have
about 19 years before the Social Security trust funds are
expected to empty. Get started now, and you'll substantially
improve your prospects.
How to get even more income during retirement
Social Security plays a key role in your financial security,
but it likely won't be enough on its own. In our brand-new free
report, our retirement experts give their insight on a
simple strategy to take advantage of a
little-known IRS rule
that can help ensure a more comfortable retirement for
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to get your copy today.
Will Social Security Be There for You?
originally appeared on Fool.com.
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