With approximately 94% of American workers covered by Social Security and 65 million people currently receiving benefits, keeping Social Security healthy is a major concern. Social Security isn't in danger of going broke — it's financed primarily through payroll taxes — but its financial health is declining, and benefits may eventually be reduced unless Congress acts. As a Fortune 500 employee potentially qualified to receive these benefits, it is imperative to keep track of policy changes and reductions.
Overall, the news is mixed for Social Security
As a Fortune 500 Employee, it is important to understand how the Social Security program consists of two programs, each with its own financial account (trust fund) that holds the payroll taxes that are collected to pay Social Security benefits. Retired workers, their families, and survivors of workers receive monthly benefits under the Old-Age and Survivors Insurance (OASI) program; disabled workers and their families receive monthly benefits under the Disability Insurance (DI) program. As a Fortune 500 employee, it is imperative to look over these benefits in the event that you, or those close to you qualify. Other income (reimbursements from the General Fund of the U.S. Treasury and income tax revenue from benefit taxation) is also deposited in these accounts.
Being employed or retired from a Fortune 500 company, you should know that money that's not needed in the current year to pay benefits and administrative costs is invested (by law) in special government-guaranteed Treasury bonds that earn interest. Over time, the Social Security Trust Funds have built up reserves that can be used to cover benefit obligations if payroll tax income is insufficient to pay full benefits, and these reserves are now being drawn down. Due to the aging population and other demographic factors, contributions from workers are no longer enough to fund current benefits. As a Fortune 500 employee, it is important to evaluate these trends and plan ahead in the event of any financial shortcomings.
In the latest report, the Trustees estimate that Social Security will have funds to pay full retirement and survivor benefits until 2034, one year later than in last year's report. At that point, reserves will be used up, and payroll tax revenue alone would be enough to pay only 77% of scheduled OASI benefits, declining to 72% through 2096, the end of the 75-year, long-range projection period. As a Fortune 500 employee, it is of extreme importance to account for the lack of funding in Social Security and plan around the possibility of diminished OASI benefits.
If you are a Fortune 500 employee with a disability, the Disability Insurance Trust Fund is projected to be much healthier over the long term than last year's report predicted. The Trustees now estimate that it will be able to pay full benefits through the end of 2096. Last year's report projected that it would be able to pay scheduled benefits only until 2057. Applications for disability benefits have been declining substantially since 2010, and the number of workers receiving disability benefits has been falling since 2014, a trend that continues to affect the long-term outlook. As a Fortune 500 employee with a potential disability, while this may seem like good news, it is crucial to consider the change in projected reports in order to not be taken by surprise.
According to the Trustees report, the combined reserves (OASDI) will be able to pay scheduled benefits until 2035, one year later than in last year's report. After that, payroll tax revenue alone should be sufficient to pay 80% of scheduled benefits, declining to 74% by 2096. As a Fortune 500 employee, it must be considered that OASDI projections are hypothetical, because the OASI and DI Trust Funds are separate, and generally one program's taxes and reserves cannot be used to fund the other program. However, this could be changed by Congress, and combining these trust funds in the report is a way to illustrate the financial outlook for Social Security as a whole. For Fortune 500 employees, accounting for the projections will ensure protection from eventual declines that would otherwise be unplanned for.
For Fortune 500 employees, it is important to note that all projections are based on current conditions and best estimates of likely future demographic, economic, program-specific conditions, and the Trustees acknowledge that the course of the pandemic and future events may affect Social Security's financial status.
You can view a copy of the 2022 Trustees report at ssa.gov.
Many options for improving the health of Social Security
The last 10 Trustees Reports have projected that the combined OASDI reserves will become depleted between 2033 and 2035. The Trustees continue to urge Congress to address the financial challenges facing these programs so that solutions will be less drastic and may be implemented gradually, lessening the impact on the public. Many options have been proposed, including the ones below. Combining some of these may help soften the impact of any one solution.
- Raising the current Social Security payroll tax rate (currently 12.4%). Half is paid by the employee and half by the employer (self-employed individuals pay the full 12.4%). An immediate and permanent payroll tax increase of 3.24 percentage points to 15.64% would be needed to cover the long-range revenue shortfall.
- Raising or eliminating the ceiling on wages subject to Social Security payroll taxes ($147,000 in 2022).
- Raising the full retirement age beyond the currently scheduled age of 67 (for anyone born in 1960 or later).
- Raising the early retirement age beyond the current age of 62
- Reducing future benefits. To address the long-term revenue shortfall, scheduled benefits would have to be immediately and permanently reduced by about 20.3% for all current and future beneficiaries, or by about 24.1% if reductions were applied only to those who initially become eligible for benefits in 2022 or later.
- Changing the benefit formula that is used to calculate benefits.
- Calculating the annual cost-of-living adjustment (COLA) for benefits differently.
This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.
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