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Op-ed: Social Security trust fund will die in 2033. You need to take action now

Ric Edelman, founder of independent RIA Edelman Financial Engines
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Valerie Macon | AFP | Getty Images

Tens of millions of Americans lost their jobs due to Covid-19. Their loss of income caused problems for themselves and their families – and for the Social Security system.

The problem is that the Social Security system is paying out more money to retirees than it collects from workers. You see, the money coming out of your paycheck does not fund your future retirement. Instead, your money is given to current retirees; the next generation to pay for your benefits, and the generation after that will pay for theirs.

This is how the Social System has always worked. It's performed just fine, thank you, for decades — because we always had lots more workers than retirees. Indeed, when the program started in 1935, there were 150 workers for every retiree. They provided more money than was needed to pay benefits, so the excess was placed into a trust fund. Today, it holds about $3 trillion.

But the worker/retiree ratio has shifted radically over the decades and Covid-19 made it worse by throwing tens of millions out of work. The result: there are now only three workers for every retiree.

The result is that the system is paying out more in benefits each year than it collects in payroll taxes. To cover the shortfall, SSA has been dipping into the trust fund. By 2033, SSA's trustees now say, the trust fund will be depleted. When that happens, the only money SSA will be able to distribute to retirees is the money it collects from workers. That's enough to cover only 76% of retiree benefits.

In other words, all retirees will suffer a Social Security benefit cut of 24%, starting in 2033. This would be a huge financial crisis for our nation. The average monthly check is about $1,400. For most retirees, it's the majority of their income. If this situation isn't averted, millions of retirees will lose their homes, be unable to pay for medicine and health care and suffer other financial challenges.

Solving the problem means cutting benefits and/or raising taxes, a problem for members of Congress seeking re-election. This is why Congress has largely ignored the issue, even though they all know this crisis is coming. To get Congress to act, I created the Funding Our Future Coalition in 2018, now the largest organization of its kind, with more than 50 academic institutions, non-profit groups, think tanks and corporate partners working together to get Congress to fix this problem.

If Congress acts now, cuts/increases will be merely annoying. If it waits, the changes will be financially devastating to tens of millions of families, threatening our entire economy.

What should you do about this? Some wonder if they should start to collect their Social Security benefits now, before the cut occurs. If you're in your 20s to early 50s, it's moot, because you can't start to receive benefits until age 62. But if you or your parents are in your late 50s to early 60s, you already can (or soon will be able to) start receiving your monthly benefits. So, pay attention.

Financial advisors like me usually tell our clients to delay starting Social Security benefits until age 70, because the older you are when you start, the more you'll receive each month. But if the benefits are being reduced 24% in 2033, should you start now, so you can enjoy the larger amounts in the meantime?

Good thinking, but no. Say you're 62 and you start now, receiving about $17,000 per year, which is the average annual payout according to SSA. If you wait until age 70, you'll receive more than $30,000 per year. Assuming you live into your 80s or beyond, you're much better off by delaying benefits.

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What could happen to your benefits if Social Security runs out of money

You're also better off even if Congress does allow benefits to be cut. The difference is smaller, but you still end up with more money by waiting. And show of hands: do you really think Congress is going to let tens of millions of retirees suffer a 24% cut in benefits? That's politically unlikely. More likely: Congress will offset at least some of the reduction by increasing taxes. And the less of a cut, the better off you are by waiting.

But perhaps your financial plan has called for you to start receiving benefits prior to age 70. If so, simply stick with your plan. The cut in benefits will be what it will be, and no change in your financial planning is required.

What is required is you and me – all of us – getting Congress to act, now. The sooner it acts, the smaller the benefit cuts or tax increases need to be. If Congress acts now, cuts/increases will be merely annoying. If it waits, the changes will be financially devastating to tens of millions of families, threatening our entire economy.

Contact your elected representatives in Congress and President Biden. Demand action now.

—By Ric Edelman, founder of independent RIA Edelman Financial Engines. Edelman has been ranked three times as the #1 Independent Financial Advisor in the nation by Barron's.

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