Social Security is set to run low by 2034
The Social Security Old-Age and Survivors Insurance Trust Fund has been drying up, partially due to the large drop in birth rates over the last few decades. Less people means less tax revenue to contribute to the fund.
High unemployment during an economic downturn could also “cause a significant worsening in the finances of the Social Security Trust Fund,” Mary Johnson told MoneyWise in October. Johnson is the Social Security and Medicare policy analyst at advocacy group The Senior Citizens League (TSCL).
Once the fund’s reserves are exhausted, you’ll only receive about 77% of your expected benefits unless Congress steps in.
One option to make up for the shortfall would be to increase taxpayer revenue, says the Center on Budget and Policy Priorities.
Orman suggests the government could consider pushing back the minimum age at which you can receive your full Social Security benefits as well. This age is currently 66 or 67, depending on when you were born.
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Inflation's impact on savings
Meanwhile, inflation is still rampant and putting a dent in people’s retirement funds.
In fact, Americans say they’ll need $1.25 million in savings to comfortably retire, which is 20% more than they thought they’d need last year. Their average retirement savings have dropped 11% from 2021 as well.
“[The government is] seeing savings account levels go down, seeing debt go up, seeing retirement accounts being withdrawn from — and seeing the potential of a problem down the road,” says Orman.
Orman worries the current economic conditions are setting the country up to become a “welfare state.”
“Is the government going to have to take care of most of the people? Because they won't have any money. So how do they solve that problem right now, before it goes in that direction?”
Credit card debt is surging at its fastest year-over-year rate in over 20 years, and it’s becoming even more expensive to borrow with recent rate hikes.
Despite this year’s COLA being the biggest in four decades, it still may not be enough to counter rapidly rising prices. Seniors received a 5.9% COLA in January, but Johnson estimates the benefit fell short by 50% on average.
“I would say while this is currently a chronic problem every year, yes, indications are that the COLA will not reflect pockets of persistently high inflation affecting retired and disabled Social Security recipients. That puts tens of millions of retirees at risk of continuing to fall behind,” Johnson wrote in a September press release.
She added in an October brief that if the economy turns to deflation next year, there’s also a possibility there will be no COLA payable in 2024.
Preparing for retirement
Inflation has cooled to 6.5%, but it is still keeping the cost of goods and services uncomfortably high for many Americans — but Orman warns not to tap into your retirement accounts to deal with the expenses.
“That is for when you retire. We're living longer right now. So that retirement account has to be bigger.”
She says it is essential that you have an emergency savings account as a buffer for unexpected expenses instead. Most experts generally advise that you set aside three to six months’ worth of living expenses.
Even after you retire, it’s crucial to have substantial savings in place. Experts told CNBC that a retiree should have one to three years worth of expenses tucked away, depending on their monthly expenses and income.
Johnson noted back in September that over half of older households have no savings in place and rely mainly on their Social Security benefits.
She says it’s also important to budget for your medical care — although Medicare premiums will drop just over $5 a month to $164.90 in 2023.
Look into your medical coverage and out-of-pocket maximums and determine exactly how much you need in savings for a worst-case scenario.
Orman echoed this sentiment in a March episode of her podcast. "For those of you who are retired ...you need to start cutting expenses right here and right now."
WATCH NOW: Full Q&A with Suze Orman and Devin Miller of SecureSave
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