Jan 17, 2024

The Looming Social Security Shortfall: Why Saving for Retirement is More Crucial Than Ever

Written by Drew Nicol, CPA

Social Security has been a staple of financial security for millions of Americans since 1937 providing essential support during retirement, disability, and other life-altering circumstances. The program currently provides benefits to over 50 million people. However, concerns regarding the sustainability of this critical program have intensified, with a looming shortfall casting shadow over the financial security of future beneficiaries.

In a report released in 2023 by the trustees overseeing the Social Security trust funds, the funds are expected to be depleted as early as 2034. Without any significant reforms to the program, by 2034, the program would only be able to pay about 76% of the scheduled benefits to retirees and beneficiaries. This would pose a substantial financial burden to millions of elderly people who rely on these benefits.

The combination of several factors has played a role in the dwindling Social Security fund. With an aging population and declining birth rates, there are fewer workers contributing to the program relative to the increased number of retirees receiving benefits. Increasing life expectancies have also led to longer durations of benefit disbursements, further straining the system’s financial sustainability. This highlights the importance of being proactive in saving and planning for retirement.

Time is your greatest ally when it comes to saving for retirement. The earlier you begin saving, the more time you have to save thereby giving your money more time to grow. Consistent contributions over several years can accumulate into a substantial amount and provide a solid financial foundation for retirement. Make sure you are taking advantage of any employer-sponsored retirement plans that offer employer-matching contributions because maximizing employer-match contributions can substantially boost your retirement savings.

There are numerous options available to save for retirement including 401(k) and 403(b) plans, traditional IRAs as well as Roth IRAs. Each has its own tax advantages that can be tailored to each individual.

Lawmakers have begun discussing plans to bridge the benefit gap which could include reducing benefits or increasing payroll taxes. However, as we get closer to 2034, we can anticipate increased dialogue around the upcoming shortfall and the potential resolutions to bridge this gap. This potential shortfall serves as a strong reminder that personal retirement savings are an essential component of financial security during retirement. If you have any questions about tax planning for retirement, please contact your BMSS advisor at (833) CPA-BMSS or visit our website for contact information.