For 4 in 10 retirees, Social Security provides at least half of their income, and for 1 in 7, it provides at least 90 percent.
However, according to the Congressional Budget Office (CBO) forecast, the Old Age and Survivors Insurance (OASI) Trust Fund will be exhausted in 2032. Both Republicans and Democrats have come up with strategies to protect the trust funds from insolvency, but their visions are starkly different.
Established in 1935, this social insurance program financially supports unemployed, disabled, or retired individuals. Social Security recipients receive monthly and other services such as survivor’s benefits, disability insurance, and Medicare. In recent times, this federal program has been the topic of much debate and controversy.
Politicians Considering Cutting Social Security Benefits
Recent reports raise concerns that without immediate congressional action, there is a high likelihood of the Social Security program going insolvent very soon.
Social Security benefits over 66 million Americans in 2022. The Social Security Administration has published that this accounts for at least half the income for 37% of older men and 42% of older women.
The last major overhaul of this program was enacted in 1983 when payroll taxes increased, and the full retirement age was increased gradually from 65 to 67.
In response to the present crisis, the Republicans have proposed two significant changes: raising the retirement age again and increasing the annual wage amount subject to payroll tax. They’ve also laid the groundwork for forming a bipartisan commission to analyze and provide recommendations for improving the program.
Despite President Biden’s promise to defend Social Security from any cuts, his administration has not proposed a concrete plan yet. However, earlier this year, Congressional Democrats proposed legislation to expand the program by making benefits more generous while raising taxes on higher earners.
Based on its budget plan released last year, the conservative Republican Study Committee recommended increasing the full retirement age to three months yearly for future retirees until it reaches 70 for those born in 1978 or later. Another critical recommendation in the Republican Study Committee’s budget plan was to reduce the benefits for higher-income Americans.
If these recommendations pass in the future, Americans will have to wait until they are 70 to collect their full retirement benefits. Postponing the age to collect Social Security will likely mean higher Social Security payroll taxes for high-income Americans. This tax is applicable only for wages up to $160,200.
As a result of increasing the retirement age to 70, Social Security recipients would likely suffer a 20% cut in their lifetime benefits. Individuals retiring at the earliest eligible retirement age of 62 would see a 43% cut in their full benefits.
Currently, Social Security payroll taxes apply to the first $160,200 of earnings. Both employees and employers are required to pay a surcharge of 6.2%. Self-employed professionals pay a tax rate of 12.4%.
Recommendations by Senators Elizabeth Warren and Bernie Sanders call for the application of payroll tax to an income of $250,000. It also suggests taxing certain investments and business income at 12.4%.
Though lawmakers are currently working to fix this problem, reaching a bipartisan agreement would not be easy. If these recommendations are accepted, young Americans will bear the brunt as their ability to retire will be affected severely.
Millennials and GenZ Struggle To Save for Retirement
In the United States, millennials and Gen Zs face the highest levels of debt, according to a Lending Tree survey from 2021. As a result of apprehensions about a potential Social Security cut, many young physicians have already changed their approach to retirement planning, with more emphasis on options such as Financial Independence Retire Early (FIRE).
This lifestyle movement is all about extreme saving and investing for retiring earlier than the traditional approach. However, FIRE retirement can be tricky because it necessitates drastically minimizing expenses and judiciously investing the saved money. Many FIRE followers save at least 50% of their earnings, which can be extremely difficult for most people. To save so much income, maximizing revenue while minimizing expenses is necessary.
While saving for their retirement, American millennials and GenZs should also consider the Social Security 5-year rule. A minimum of 5 years of covered earnings is required to qualify fully for retirement benefits.
Covered payments include the money on which taxes have been paid, such as self-employment income or wages. Social Security benefits are reduced for individuals without five years of covered earnings. Social Security’s spousal benefits are also at risk in potential proposals from Republican presidential candidates.
Physician on Fire, a financial advisory for physicians, firmly believes that money is everything regarding retirement and mental health. The platform mentions that though everyone cares about money, only a few can make the wise and sometimes difficult decisions required to grow their money.
According to them, primary education in personal finance is essential for all in the current economic environment. PhysicianonFire.com heavily stresses building a surplus of money through tax-efficient investment, tax-deferred retirement contributions, and expenditure monitoring.
It also recommends creating a healthy gap between income and expenditure by managing all spending within 50% of take-home pay. The website is actively involved in helping physicians increase their earnings via different side gigs suitable for them.
Despite recent market volatility, inflation, rising interest rates, and fears of recession, a recent survey by NerdWallet revealed that 25% of Americans want to retire before reaching the age of 50, and 18% of them have plans to retire in their 50s.
The ongoing debate on a potential revision of the Social Security program is undoubtedly an excellent concern for them. However, only time will tell if these unpopular recommendations will eventually become a part of the law.