Have you ever wondered where your Social Security payroll tax deduction is going?
The Social Security Trust Fund covers Federal Old Age & Survivors Insurance Trust Fund and the Federal Disability Insurance Trust fund, which in combination equate to the Social Security Trust Fund.
Social Security started in 1935 on the tails of the Great Depression and as part of the New Deal. Funded by payroll taxes, this program invests its funds in securities issued and backed by the full faith of the federal government. The investments in U.S. Treasurys earn a rate of interest that help support the ongoing payments to eligible individuals. Up until 2020, the programs were running a surplus. As of 2021, that is no longer the case.
Various projections suggest the Federal Old Age fund will run out by 2033 and that the Disability Trust Fund will run out in 2057. At that point and without government intervention, recipients would earn approximately 76 percent of the program’s obligations. Every year suggestions are floated to resolve the issue. Some of them include: raising of the retirement age, changing the formula, raising taxes, borrowing more money or having the government spend less.
From a practical financial planning projection standpoint, it’s impossible to know what the politicians will do. That being the case, it’s always prudent to run several scenarios, such as a lower overall benefit during retirement or running your projections without inflation adjustments. Hopefully, we will all receive what we have been expecting benefit-wise, but it makes sense to plan for other outcomes just in case the politicians don’t keep their promises.
Thankfully, having a robust Social Security program is one of the few issues on which both parties can agree. From my perspective, it is a worthwhile safety net since most retirees no longer receive pensions and many arrive at retirement with less-than-adequate retirement savings.
Thankfully, with the cost of living continuing to rise, Social Security payments keep many older Americans out of poverty.
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Eric Tashlein is a Certified Financial Planner professional, founder and financial advisor at Connecticut Capital Management Group, LLC, 2 Schooner Lane, Suite 1-12, in Milford. He can be reached at 203-877-1520 or through www.connecticutcapital.com. This is for informational purposes only and should not be construed as personalized investment advice or legal/tax advice. Please consult your advisor/attorney/tax advisor. Investment Advisor Representative, Connecticut Capital Management Group, LLC, a Registered Investment Advisor. Connecticut Capital Management Group, LLC and Connecticut Benefits Group, LLC are not affiliated.