According to the Social Security and Medicare Boards of Trustees, the Social Security fund will be exhausted in 2036. Because there will still be money coming into the fund via payroll taxes and interest from treasury bonds, this doesn’t mean that all Social Security payments will be stopped in 2036. But it does mean that benefits would have to be cut to keep the fund solvent. Given current forecasts, Social Security payments would have to be cut by 25% across the board in 2036 in order to keep the fund from going bankrupt.
The reality is that the problem could get much worse. The payroll tax, which funds Social Security, was recently cut for employees. It went from 6.2% to 4.2%, which means $111.7 billion less flowed into the Social Security fund. And now President Obama is proposing to cut the payroll tax for both employees and employers to 3.1%. This will only speed the demise of Social Security and will very likely mean cuts in benefits before the year 2036.
So what does this mean in terms of retirement planning? If you are currently receiving Social Security benefits, congratulations! You will get most if not all of what was promised to you. But for those who won’t begin receiving benefits for ten years or more, the responsible way to plan is to assume you will not receive as much as the government has promised.
This is just one more serious blow to so many that have already lost big chunks of their retirement funds due to the stock market and housing market collapses of the past four years. Fifty-seven percent of Baby Boomers in a recent survey said they lost money in their retirement plans, personal investments or real estate during the recent economic meltdown and 42% said these losses directly led to their decision to delay retirement so they can rebuild their nest eggs.
In terms of planning for retirement, if you will not begin receiving Social Security payments for at least ten years, you should cut your project benefits by about 25% when generating a retirement plan. Then see when you will run out of money in retirement. It is likely that most people will see their projected funds run out way too early in their retirement years, which brings up the next question: What should I do now?
There are several steps one can take to help make up for any cuts to Social Security payments. The most popular step is to simply delay retirement and work longer. Another idea is to cut expenses today and put more towards savings. Also, many people will have to cut their expenses in retirement. Four vacations a year might have to be cut to two. The second home on the beach or in the mountains might be only a fantasy at this point.
It might take one of the steps highlighted above or some combination of them to help individuals feel secure that they won’t run out of money in retirement. But it’s important to have an actual financial plan that runs through scenarios that will show you when you will run out of money and what you can do to prevent this from happening. Simply hoping things will get better is not a strategy.