Dave Ramsey has warned that Social Security faces challenges that beneficiaries may not fully understand. The program is funded until 2034, after which its trust funds will be depleted. Currently, the cost of one Social Security beneficiary is shared by 2.7 workers.
This ratio will drop to 2.4 workers per beneficiary by 2034 due to the retiring baby boomer generation. Ramsey emphasizes that while Social Security is facing financial challenges, this does not mean beneficiaries will receive no payments at all. After 2034, the program will provide about 80% of the monthly payment amounts.
Legislative action may also be taken before the trust funds run out to fund the program with currently expected benefits fully. Ramsey suggests that individuals should take a 401(k) match while working if their employer offers one. He also recommends investing 15% of their income, starting with the employer match and then contributing the remainder to a Roth IRA.
The Roth IRA allows investors to pay taxes on their contributions upfront, making withdrawals taken after age 59 and a half completely tax-free. In summary, Dave Ramsey’s advice for Americans planning for retirement includes being cautious about relying solely on Social Security, taking advantage of employer 401(k) matches, and investing in a Roth IRA to ensure financial stability throughout retirement years. Social Security is swaddled in elaborate myths, but at the bottom, it is simply a vast government transfer program that taxes money away from one segment of the population — working people — and distributes it to another segment: retirees.
Social Security is distinguished from other transfer programs in several critical ways. First, it is almost inconceivably enormous. Social Security consumes more than one-fifth of this year’s federal budget, making it the largest expenditure by a wide margin — it is $550 billion more costly than national defense, the second-largest budget item.
Second, it is unsustainable because Social Security has always been funded primarily with payroll taxes. When the program began, 160 workers were paid into the system for every retiree taking benefits out of it. Today, there are about 2.5 workers for each retiree, and the number is still dropping.
Payroll taxes will cover only 77 percent of scheduled benefits within a decade. At that point, unless the law is changed, benefits will be cut by 23 percent. Everyone in Washington can see the looming crisis.
Yet Republicans and Democrats stubbornly insist that changes to Social Security are off the table. One way or another, though, changes must come. Perhaps the most significant change would be acknowledging that Social Security has outlived its original purpose.
When the program began in 1935, the elderly were the poorest age group in America. Today, they are the wealthiest. Seniors have the lowest poverty rate of any age group, and their average household incomes have grown as fast as the average worker since 1980.
In FDR’s day, there were no IRA and 401(k) accounts, few Americans owned stocks, and the average lifespan was too short for most people to accrue significant wealth. Now that that has changed, does it really make sense to keep taxing younger, poorer workers to pay benefits to retirees who are far better off than they are?
Social Security funding challenges and solutions
For 40 years, Social Security has been called the “third rail” of American politics. It doesn’t have to be. If just a few responsible political leaders would step up to take the lead, the nation’s most gigantic spending program could be refashioned for the 21st century.
With relatively straightforward reforms, low-income seniors could be protected while the young could be empowered to build wealth. The best way to start is by sweeping away the mythology that has made it so confusing. Social Security is a complex system run by the Social Security Administration (SSA).
Most people assume it is just retirees who receive monthly checks to cover expenses, but this is far from the truth. The SSA runs five main programs, each with its own quirks and details that can be unfamiliar to those who have not needed federal assistance. Everyone thinks they know Social Security: many people strive during their careers to retire and receive a monthly check to cover expenses.
However, an important point is that the full retirement age does not necessarily mean you will receive the maximum benefit. For those who can wait to collect payments, retirement benefits increase by up to 8% annually until age 70. Simply delaying the payments can mean your benefit might be 24% higher than expected.
Although not everyone can afford to wait, even a delay of one year could be worth the wait. A common misconception about retirement benefits is that you have had to work to qualify, but this is not entirely true. Current and former spouses can apply for benefits based on the retired person’s record if they have a higher benefit.
The situation is a bit trickier for ex-spouses: they cannot have remarried and must have been married to the beneficiary they are claiming for at least 10 years. This ensures that those dependent on their partner during the marriage have their own resources should anything happen to the breadwinner. There is no limit to the number of spouses and former spouses who can claim this benefit.
An ex-spouse’s claim will not affect the current spouse’s eligibility. Disability benefits are the second most known benefit after retirement. They are available to workers who have a chronic or acquired disability and have worked for a sufficient number of years to qualify.
This payment is also linked to the Medicare program because disabled people usually have higher healthcare needs. This program helps disabled workers maintain their independence and a stable income and provides a safety net should their condition improve or they receive retraining for a better-suited job. Better known as family benefits, these payments correspond to the children or dependents of retirees with a permanent disability.
For retirees with children under 18 or a permanently disabled child, this benefit provides extra support for the family. The child does not have to be a direct biological relative; the benefit can apply to stepchildren, grandchildren, and adopted children as long as they meet the criteria. If a retiree passes away, Social Security will continue to provide a continuing income to spouses, children, and dependents.
This helps families deal with the financial loss of the breadwinner. Understanding these lesser-known benefits can help maximize what you or your loved ones receive from the Social Security system. It pays to be informed and know how the SSA can help beyond just the monthly retirement check.
