Social Security Trust Funds May Run Dry by 2034 – Here’s What That Means for Younger Pre-Retirees

We’ve been aware of the shortcomings of the social security program since the 1970s. Concerns about social security trust funds running dry are not new but with every passing year the estimate of when exactly that will happen creeps closer than prior estimates indicated. The newest social security trustees report shows that the fund may be exhausted as soon as 2034. 

This has many people wanting answers to the question – what happens if social security runs out of money? Fortunately, pre-retirees, especially the younger generations, have time to make adjustments to their retirement plans to account for reduced social security benefits. But before we discuss the backup plan, let’s take a look at how the retirement crisis happened.

Where We Started and Where We Are Now

When the Social Security Act was signed into law in 1935, it was appropriately designed to address the needs of Americans hit hard by The Great Depression. Millions of Americans found themselves out of work and struggling to provide for their families, with the elderly disproportionately impacted. 

The Social Security Act served to provide benefits for Americans age 65 and older from contributions they made during their working years and tax income from those still in the workforce. Eventually benefits also extended to their dependents (even if they hadn’t made any contributions to the program).

The actuaries used to determine how the program would be funded and maintained were based on America as it was in 1935, which is a far cry from America in the 21st century. Today, life expectancy has increased considerably. And the original ratio of working Americans paying into the program to retirees drawing from it has drastically shifted. 

In the 1930s, approximately 1 in 5 Americans were of age to draw social security benefits, whereas today it’s 1 in 3. This means far more benefits are being paid out with significantly fewer workers contributing to the reserves. 

The potential shortfalls of the Old-Age and Survivors Trust Fund (OASI) have been the subject of debate for decades. Will it run out or not? And if so, when? Each year the Trustees of the Social Security and Medicare trust funds issue a report detailing the current financial status of these programs and an analysis of what’s to come. The most recent annual report states that the OASI fund will be exhausted by 2034 if Congress doesn’t intervene. 

In response to the looming retirement crisis, we can reasonably expect Republicans to propose decreased benefits and Democrats to urge increased taxes to cover the shortfall. Time will tell if they can come together to take appropriate action. Though infighting will inevitably ensue, the government is highly motivated to come up with a solution.

What Happens If Social Security Runs Out of Money?

We’ve heard the warnings for decades that social security is going to eventually run out, and it may come to fruition sooner than later. But what isn’t clarified in those claims is exactly what it means for retirees if the OASI fund is indeed drained. Many assume that retirement benefits will vanish altogether and fortunately, that isn’t the case. 

The OASI fund only accounts for 24% of social security benefit payments. The remaining 76% of scheduled benefits are paid from taxable income which will continue if the OASI fund is exhausted in 2034 as predicted. So what happens if social security runs out of money? You can expect a ¼ reduction in the benefits you otherwise would have received in retirement. 

How Younger Generations Can Prepare for Reduced Social Security Benefits

If you’re early in your career, your retirement strategy will be vastly different from those who are nearing retirement. Implementing a plan with the following considerations and strategies now will better position you for a stress-free transition into the retirement lifestyle you dream of. 

Delay Taking Social Security Benefits 

If you’re in your 20s, 30s, or even 40s, you have decades of earning years left. Thinking about when exactly you intend to start collecting social security benefits may seem unimportant at this stage in life. But it doesn’t hurt to commit now to delaying your benefits as long as possible (which is 70 years of age) and building a strategy that will get you there.

In some cases, collecting benefits at age 70, as opposed to age 62, could increase your monthly payment by 77%. That’s a huge difference! And if benefits do get drastically cut by the time it’s relevant to you, proper planning to maximize your social security payment is even more important. 

If retiring from traditional employment closer to the age of 60 is important to you, then you’ll need to continue generating income in that interim period, and ideally for the rest of your life. Crafting a retirement strategy early on to prioritize income-producing assets is a great way to accomplish that. 

Income-Producing Assets

In response to concerns about the security of retirement benefits, the IRA and 401k retirement plans were established. Tax benefits associated with these accounts incentivize individuals to start contributing to their retirement by investing in stocks, bonds, ETFs, and other securities. 

However, the returns on these investments don’t often produce enough income to provide the comfortable retirement retirees are working so hard to achieve. 

Income-producing assets are alternative investments that generate a consistent stream of revenue for whatever length of time you maintain ownership of the asset. A few examples of income-producing assets are:

Shifting your retirement strategy to incorporate income-producing assets can add diversification to your portfolio and potentially earn higher returns. To utilize this strategy, it helps to learn a little bit about self-directed IRAs.

Self-Directed IRAs

The assets listed above are considered non-traditional or alternative investments, which are typically off the table with a traditional IRA or 401k. 

A self-directed IRA can help individuals develop a creative investment strategy that provides consistent income. This type of retirement account has the same tax advantages and maximum contribution limits as a Traditional or Roth IRA but provides you the freedom to invest in non-traditional assets.  

No investments are without some measure of risk. But if you are early in your career with decades of working years ahead of you, you may be able to withstand higher risk for increased reward. Making smart investments in non-traditional asset classes could reasonably generate returns up to 10%. 

Leave Social Security Worries Behind with Chicago Trust Administration Services

With the possibility of heavily reduced social security benefits looming in the not-so-distant future, it’s important to set your sights on higher returns and income-producing assets that you can maintain into retirement. 

Social security benefits will always be there but how much they will decrease over the next decade and beyond is yet to be seen. It is clear, however, that counting on the social security trust fund to provide a significant portion of retirement income is not a safe bet.  

If you’re ready to face retirement confidently and boldly with a creative and sustainable strategy through a self-directed IRA, Chicago Trust Administration Services is ready to help. 

To see how we can help, we invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com. 

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*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.

Steven Miszkowicz