Plan like Social Security won't be there, expert says as insolvency looms

These days, the future of Social Security is looking far from secure.

A key fund that supports the lifeline for retirees is now expected to run short on cash by 2033, a year sooner than before. Medicare isn’t far behind.

The outlook is so grim that the cofounder of a popular wealth management service is telling all of his clients under 40 to prepare as if Social Security won’t be there at all.

“I call it the YOYO economy — You’re On Your Own,” says Brent Weiss of Facet Wealth.

If you’re already struggling to save or pay down debt, Weiss says, the forecast shouldn’t drive you to despair. Instead, it should inspire you to take control of your own retirement.

Pandemic speeds up the timeline

The Treasury Department oversees two funds that provide income for the Social Security program: the Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund.

While the funds going insolvent has been a concern for years, the pandemic has made the situation worse. Social Security is financed through a dedicated payroll tax, and a steep drop in employment has shrunk the government’s revenue.

After 2033, the Old-Age and Survivors Insurance Trust Fund will only be able to pay out 76% of the scheduled retirement benefits, based on the revenue it expects to bring in.

This year’s status report from the Treasury also says the Disability Insurance Trust Fund is expected to run out by 2057 — eight years sooner than previously estimated — at which point it will only be able to pay 91% of benefits.

To close the gap for the two funds, the government would either need to hike the payroll tax by 3.36 percentage points or reduce annual spending by 21%, according to the report.

Medicare’s future looks uncertain, too

While not as dire as the projections for Social Security, decreased tax revenue will also have an impact on what the Medicare program will be able to afford.

The insolvency timeline hasn’t sped up yet, as Medicare’s expenses dropped during the pandemic while Americans avoided elective care.

This year’s projection anticipates that Medicare will run out of the cash to cover all of its bills under Part A — which covers care at a hospital, skilled nursing facility or nursing home as well as home health services — in 2026.

To close the gap, Medicare would either need to increase its payroll tax rate by about 0.77 percentage points or reduce its spending by 16% each year, according to the report.

Those estimates would go out the window if Congress changes or extends the government’s current policies — meaning the outlook could be more grim.

That said, the Democrats’ planned expansion of Medicare coverage to include vision, dental and hearing care won’t impact the trust fund’s solvency because Part B and D get their funding from different sources, like premiums paid by policyholders.

Make a plan as soon as possible

While Weiss sees the funds’ depletion as “likely an inevitability,” the federal government has a number of options to right the course. In addition to raising taxes or cutting benefits, it could raise the retirement age, cut the annual cost-of-living adjustment or make other tax changes.

Whatever the government does or doesn’t do in response to the crisis, Weiss says not to sit around worrying.

“I look at it as an opportunity, especially for younger individuals, to develop a financial plan to create their own financial independence,” he says.

Americans should make the most of the years they have before retirement by maxing out their employer-matching 401(k) contributions, which he describes as “the closest thing he’s seen to free money.”

Weiss also says to set aside money in a health savings account on top of finding affordable health insurance so you’ll have money to fall back on to cover medical bills.

“Yes, we should be concerned that there is an inevitable change coming to this landscape,” says Weiss. “The good news is that time is still on our side and we can make smart, informed decisions with our money today to hopefully help us live well in retirement.”

How to find the cash you need for retirement

Weiss says you don’t need to make large, sweeping changes to start effectively saving for retirement. He suggests taking a 1% approach: Begin by putting aside 1% of your income and slowly adding on another percentage point every six to 12 months.

“Most people will tell you to make very big changes in your life to ultimately retire well, but I think it’s actually about these incremental, imperfect, but implementable changes you can make,” he says.

If you’re not sure how much you need to save or where to start, knowledgeable and professional advisers are more affordable and accessible than they’ve ever been.

Once you have a clear idea of your end goals, look into some pain-free ways to trim your budget and free up more cash for retirement. One easy win: downloading a free browser extension that automatically scours the internet for better deals or coupons every time you shop online.

Finally, to make saving as simple as possible, consider automating your plan. With one popular investing app, you can grow your savings by automatically investing with your “spare change” from everyday purchases.

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.