Today, the future of Social Security looks far from secure.
A major fund supporting the lifeblood of retirees is expected to run out of cash by 2033, a year earlier than before. Medicare is not far behind.
The outlook is so bleak that the co-founder of a popular wealth management service tells all his clients under 40 to prepare as if Social Security won’t be there at all.
“I call it the YOYO economy — you’re on your own,” says Brent Weiss of Facet Wealth.
If you are already struggling to save or pay off debtsWeiss says, don’t let the weather forecast drive you to despair. Instead, it should inspire you to take your own retirement into your own hands.
Pandemic speeds up the timeline
The Treasury Department oversees two funds that provide revenue for the Social Security program: the Old Age and Survivor Insurance Trust Fund and the Disability Insurance Trust Fund.
While the bankruptcy of the funds has been a concern for years, the pandemic has exacerbated the situation. Social security is financed through a special payroll tax, and a sharp drop in employment has reduced government revenues.
After 2033, the Retirement and Survivors Trust Fund will only be able to pay out 76% of the planned pension benefits, based on the expected income.
This year’s Treasury status report also says that the Disability Insurance Trust Fund is expected to run out in 2057 — eight years earlier than previously estimated — at which point it will be able to pay just 91% of benefits.
To close the gap for the two funds, the government would either have to raise payroll taxes by 3.36 percentage points or cut annual spending by 21%, the report said.
The future of Medicare also looks uncertain
While not as dire as Social Security forecasts, reduced tax revenues will also impact what the Medicare program can afford.
The insolvency timeline has not accelerated yet as Medicare costs fell during the pandemic while Americans avoided elective care.
This year’s projection expects Medicare to run out of money by 2026 to cover all of its bills under Part A — which covers care in a hospital, skilled nursing facility or nursing home, and home health services.
To close the gap, Medicare would need to either increase its payroll tax rate by about 0.77 percentage points or cut its spending by 16% per year, according to the report.
Those estimates would go out the window if Congress changes or expands current government policies — meaning the outlook could be grim.
That said, the Democrats’ planned expansion of Medicare coverage to include: facial, dental and hearing care does not affect the solvency of the trust fund, as parts B and D get their funding from various sources, such as premiums paid by policyholders.
Make a plan as soon as possible
While Weiss sees the depletion of funds as “probably an inevitability,” the federal government has a number of options to rectify the course. In addition to raising taxes or lowering benefits, it can raise the retirement age, lower the annual cost of living adjustment, or make other tax changes.
Weiss says he is not worried about what the government is doing or not doing in response to the crisis.
“I see it as an opportunity, especially for younger people, to develop a financial plan to create their own financial independence,” he says.
Americans should make the most of the years they have before retiring by: maximize their employer-matching 401(k) contributions, which he describes as “the closest he’s seen to getting money for free.”
Weiss also says to put money aside in a health savings account on top of find affordable health insurance so you have money to fall back on to cover medical bills.
“Yeah, we have to worry about an inevitable change coming to this landscape,” Weiss says. “The good news is that we still have time on our side and today we can make smart, informed decisions with our money to hopefully help us live well after retirement.”
How do you find the money you need for your retirement?
Weiss says you don’t need to make any major, drastic changes to start saving for retirement effectively. He suggests taking a 1% approach: start by putting 1% of your income aside and slowly add another percentage point every six to 12 months.
“Most people will tell you that you have to make really big changes in your life to eventually retire well, but I think it’s really about these incremental, imperfect, but implementable changes that you can make,” he says.
If you’re not sure how much to save or where to start, expert and professional advisors are more affordable and accessible than ever.
Once you have a clear idea of your end goals, you can check out some pain-free ways to cut your budget and free up more money for retirement. An easy win: downloading a free browser extension that automatically scours the internet for better deals or coupons every time you shop online.
Finally, to make saving as easy as possible, consider automating your plan. One popular investing app lets you grow your savings automatically investing with your “change” of everyday purchases.
This article provides information only and should not be construed as advice. It comes without any kind of warranty.