The US government pays out Social Security benefits via payroll income tax. It’s lack of ability to manage money efficiently has left the Social Security trust fund in a downward spiral. With the baby boomer generation aging in, much more money is being paid out than is being generated.
Prior to COVID-19, the trust fund was projected to run out of money by 2035. Due to the increase in unemployment, the federal income tax revenue will drop significantly, therefore making the projections worse. Additionally, a lot more Social Security benefits may soon be paid out because people, who are now out of work and eligible to draw benefits, may soon do so out of sheer economic need.
Once the Social Security trust fund is depleted, Social Security tax receipts are only expected to provide enough money for about 75-80% of projected benefit outlays. This projection was prior to the pandemic. With the deterioration of the economy, these financial projections could get even worse.
One of the ways our government avoids paying beneficiaries their fully vested Social Security benefit is by taxing it. When Social Security was first enacted, it was voluntary and the benefits were to be distributed tax free. In 1983 the government changed the law and began taxing as much as 50% of Social Security benefits (depending on where the beneficiary received their income). In 1993 the government changed the law again and increased that threshold to 85%. To better understand the significance of the 85% tax on your Social Security benefits, the average couple will loose $250,000 of their benefits due to the additional tax during their retirement.
Unfortunately most people have their retirement money saved in qualified retirement plans that allow the government to do this. The good news is that, with proper education and planning, you can avoid the additional taxes altogether.
What you don’t know can cost you a lot of money so contact me today to learn other retirement options..