Bankrupt. Insolvent. In trouble. Fair or not, these are just a few words some people use to describe Social Security.
Making dramatic statements about the uncertainty of Social Security’s future, whether they’re accurate, always gets attention. This is because the program, which has been providing benefits to retirees since 1935, enjoys widespread support among the public.
Is there any truth to these claims? And if so, what can the average American do about it? Let’s look at where we stand today.
Americans love Social Security.
A recent study found that 85% of Americans believe Social Security is a critical program to help ensure that retirees have dependable income.1
It’s no wonder Americans like Social Security so much. At the end of 2015, the program paid benefits to 60 million people, including:
- 43 million retired workers and their dependents.
- 6 million survivors of deceased workers.
- 11 million disabled workers and their dependents.2
But doom-and-gloom predictions about Social Security being on life support are causing many to doubt its future. Another recent study found that 77% of workers are concerned that Social Security won’t even be around for them when they retire.3
Social Security isn’t going away.
Here’s the good news: Social Security isn’t running short of money. Yet. The program has enough cash to pay promised benefits to retirees until 2034, or possibly longer if the economy grows at a higher rate than it is today.4
The bad news? Unless Congress makes changes to the program before 2034, future recipients could see up to a 21% reduction in benefits. Because of Social Security’s popularity, Congress will most likely take steps to make sure that doesn’t happen. Even if Congress isn’t able to make changes, however, Social Security will still have enough money to pay benefits at 79% of current levels.5
Congress has already taken steps over the years to help bolster Social Security. In 1977, they increased the Social Security tax that comes out of everyone’s paycheck and decreased benefits slightly. In the early 1980s, taxes were increased again, this time mostly on the wealthy. In addition, the full retirement age was increased to 67 for those born in 1960 and later.
Why are we facing this potential dilemma? Good question.
Social Security is what we call a “pay-as-you-go” system. This means that benefits for current retirees are funded by taxes that current workers and employers pay. What makes this approach tricky is that the number of current retirees isn’t always the same as the number of workers supporting them. This can lead to imbalances in the program. Let’s look at how this is playing out:
- Up until 2010, the program took in more taxes than it paid out in benefits. This created a surplus, which was stashed into “rainy day” trust funds.
- Since 2010, Social Security has been paying out more than it’s been collecting. This is because now more people are receiving benefits and fewer workers are paying into the system due to the first wave of retiring Baby Boomers.
- Starting in 2020, benefits are expected to start being paid from the trust funds. It’s those trust fund balances that are expected to run out in 2034 unless the system changes.
Create your own retirement income.
Regardless of what happens to the current system, remember that Social Security was never designed to be the only source of income for retirees. According to the Social Security Administration, benefits under the program today will replace about 40% of the average worker’s pre-retirement income — although that percentage tends to be lower for people in higher income brackets and higher for people in lower income brackets.6 Either way, most people are going to need more than that to have the retirement lifestyle they want.
This is why it’s so important to save money during your working years. Money you invest in tax-advantaged retirement accounts like Individual Retirement Accounts and 401(k)s can grow over time. These savings and the related investment growth may help provide the rest of the income you’ll need later in life.
It’s also key to remember that when you begin claiming Social Security matters. If you start claiming early or right at your full retirement age, you’ll receive less each month than if you wait until you’re 70 to start claiming. So claiming early because you’re worried about Social Security going under can be a mistake.
Social Security is going to be there for baby boomers, Gen Xers, millennials, and likely younger generations as well. But counting on it to fund your retirement on its own may leave you falling short of your goals. A smarter strategy is for you to build additional retirement income sources through saving and investing. This way, you can consider Social Security benefits the piece of pie that goes with your home-cooked retirement income.
1 Americans Make Hard Choices on Social Security, Report Highlights, Elisa A. Walker, Virginia P. Reno, and Thomas N. Bethell, National Academy of Social Insurance, October 2014, page 2
2, 4, 5 The 2016 Annual Report Of The Board Of Trustees Of The Federal Old-Age And Survivors Insurance And Federal Disability Insurance Trust Funds, June 22, 2016: page 2; page 4; page 6
3 Perspectives on Retirement: Baby Boomers, Generation X, and Millennials, 17th Annual Transamerica Retirement Survey of Workers, August 2016, Transamerica Center for Retirement Studies; Page 4
6 Retirement Planner: Learn About Social Security Programs. (n.d.). Retrieved June 13, 2017, from https://www.ssa.gov/planners/retire/r&m6.html