How the generations are impacting Social Security

February 9, 2022

Terry Kane
Retirement Planning Consultant

As always, there is a lot of information and misinformation surrounding the status of the Social Security benefit. There is some fear the program will run out of money and those who have paid in will not receive the benefits they believe they are due.

It is first imperative to understand how the Social Security program is funded and dispersed. The program was written into law in 1935, is funded by payroll taxes from both employers and employees, and disbursed to those collecting the benefit at that time based on a percentage of their highest 35 years of wages. The first Social Security check was written for 17 cents to Earnest Ackerman who paid 5 cents into the program.

Today, the largest generation in the history of the program, Baby Boomers, is retiring, and the workforce behind them is made up of one significantly smaller generation, Gen X, the largest living generation, Millennials, and the generation that has not fully entered the workforce full-time, Gen Z. This combination, plus the trend in living longer and thus collecting benefits for longer, creates a potential deficit in the program as there are not enough American workers to fulfill the demands on the system.

To clear up some confusion, the Social Security Administration has released information on the status of Social Security over the coming years. According to their latest statement about the trust fund cash flows and reserves, reserves are projected to be depleted by 2034 if no other changes are made to the tax. If the resources are depleted, an estimated 78% of the scheduled benefits will be paid from tax receipts alone. There have been indications that measures are being taken to improve the funding situation as the W-2 taxable income level for 2022 was raised to $147,000 from the previous year level of $142,800.

However, considering 70 percent of the population is collecting Social Security before full retirement age (FRA), and there are fewer workers to backfill the funding, there is still significant strain on the system. Additionally, many Boomers are taking the restricted application and collecting on their spouse's benefit, while letting their own benefit grow. With the largest generation collecting Social Security earlier and at overwhelming rates, coupled with longer lifespans, more of the benefit has been collected than likely anticipated at the start of the program.

Uncertainty about the future of Social Security funding could result in premature collection that does not align with your goals and could be costly or unnecessary. Consult with a retirement planning specialist to stay abreast of the state of Social Security and develop a plan that is advantageous for you.

For assistance with Social Security planning, contact us at 888.556.0123 or submit our online form.