April is National Social Security Month and this year the Social Security system turns 84. A great deal has changed since 1935 and you may be worried about how the future of Social Security may impact your own future. Let’s start by understanding how the system works.
Social Security is a pay-as-you-go system.
Each week, payroll taxes are collected from workers and employers across the country. That money is used to purchase U.S. Treasury securities, which are held in the Social Security Trust Fund. (Congress is not spending your Social Security taxes; in fact, they can’t touch that money.) Then each month, the trust fund sells enough of its Treasury securities to pay out benefits to roughly 46 million Social Security recipients. That’s why it is called a pay-as-you-go system. Today’s workers pay taxes that are used to pay today’s recipients.
Is the system going bankrupt?
It’s important to understand that, despite what you may have heard in the media, the Social Security system is not going bankrupt. That said, the money that is currently held in the trust fund is estimated to run out in 2037. At that point, the Social Security Administration estimates that incoming payroll taxes will only be able to support 76 percent of scheduled benefits. This is because there will be more and more retirees (think baby boomers) being supported by fewer workers. The bottom line — we have a problem, and Congress has yet to decide how to fix it.
Will Social Security provide you with the retirement income you’ll need?
You should also know that Social Security was not designed to replace all your pre-retirement income. According to SSA, benefits at full retirement age (ranging from ages 65 to 67) will provide only 75 percent of a very low earner’s wages, 40 percent for medium earners and 27 percent for high earners. That means you will need to provide the rest.
Is anything being done about all this?
These problems have contributed to what many are referring to as a retirement crisis. In response to this crisis, Ric Edelman, co-founder of Edelman Financial Engines, helped create Funding Our Future — an alliance of organizations dedicated to making a secure retirement possible for all Americans. The alliance informs the public about the barriers to retirement security and calls on policymakers to make strengthening retirement policies a top priority.
In just its first year, Funding Our Future has advanced a number of ideas that could help to address the growing retirement crisis. Here are just a few:
• Provide more Americans access to simple, low-cost retirement savings products and services.
• Increase automatic enrollment in workplace retirement savings plans, individual retirement accounts and other existing retirement plans, perhaps even making it mandatory. States that have done this report positive results, he says.
• Increase tax incentives for people to save and help them understand it’s in their best interests to take advantage of such incentives.
Ric Edelman, other experts and leading organizations are working with Funding Our Future to find solutions to the retirement crisis. Meanwhile, your employer sponsors retirement benefits that can play a major role in providing for your future retirement. But, when it comes to ensuring the retirement security that you deserve, the ultimate responsibility rests with you.