Is social security going to run out in 2033? If I am a high-income earner, will social security reduce my benefit? For those of us who have planned for social security, as we are getting closer and closer to retirement, do we have cause to be anxious? In this episode of Best in Wealth I will answer both questions (but do not be afraid).

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Outline of This Episode

Will social security run out in 2033?

The quick answer is no. If you are working right now, you are paying 6.2% of every dollar you earn (up to the cap) to social security. Your employer has to pay another 6.2%, for a grand total of 12.4%. All of that money is used towards paying those collecting social security.

When we have more money coming in, we add to the Old-Age and Survivors Insurance Trust Fund (OASI) (the social security trust fund). What is the problem? More people are collecting social security than there is money coming in.

The trust fund will hit zero by 2033—but only if we do not do anything about it. If nothing happens, it does not mean that social security is done. Every person still working is still paying 12.4%. There is still enough money coming in to pay for 75–77% of all the benefits of people retiring for another 75 years. That is some relief, right?

Will the age of “full retirement” shift again?

Did you know we also ran into this problem in 1983? The social security trust fund was about to hit zero. What happened? Over the course of 23 years, they raised the full retirement age from 65 to 67. Because the government did this, they predicted that social security would not go bankrupt for 50 years. They will be right (give or take 6 months). What does that mean for us?

If we raise the full social security age from 67 to 69, we could easily add another 40–50 years to the social security trust fund. Because life expectancy is far higher now, it makes sense. They would do this gradually over a 20-year period. But they will not do anything until they have to.

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How social security payments are calculated

If you are a high-income earner, will the government take away some—or all—of your social security? To answer this question, we need to address how your social security payment is calculated. Make no mistake: It is a complex formula.

The government takes the average of your highest 35 working years to come up with the Average Indexed Monthly Earnings (AIME). However, every year is indexed up for inflation. What does that mean?

The first year I worked and paid into social security was 1989. I made $1,992. However, that number is indexed up to almost $6,000. In 1996, I made $19,800, which is indexed up to $39,500. In 2000, I made $45,692 which is equivalent to $87,000 in today's dollars.

The second thing that you need to know is that social security is taxed up to a cap. In 2023, if you make over $160,200, everything above that is not taxed at 6.2%.

Once you have reached 35 working years, you divide the total amount by 420 and come up with your AIME. Once we have that number, we know what you will receive if you collect at full retirement age. But wait—there is a bit more. We have to take into account what is called the “bend point.”

Let’s say you make $10,000 per month. The first $996 of your $10,000 you get a replacement rate of 90%. So you will get $869 in social security for that first “bend point.” The second bend point hits at $6,002, so your next $5,006 is a replacement of 32%, or $1,601. On the last $5,898 (but the $4,028 you have remaining) the replacement rate is reduced to 15%. So on the last $4,028, you get $600.

Your monthly social security payment—if you made $10,000 a month—is $3,074 a month. Whew.

So to answer the question, “Will they take my social security benefits away?” They already are.

NOTE: The bend point is based on calculations from 2021.

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The Best In Wealth Podcast is hosted by Scott Wellens. Scott Wellens is the principal at Fortress Planning Group. Fortress Planning Group is a registered investment advisory firm regulated by the US Securities and Exchange Commission in accordance and compliance with securities laws and regulations. Fortress Planning Group does not render or offer to render personalized investment or tax advice through the Best In Wealth Podcast. The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.