One of the questions that I get a lot as a financial planner and a financial therapist is, “Will Social Security be there for me?” With a lot of folks, especially younger people, it’s just a foregone conclusion that they can’t count on Social Security. This particular idea is fed by a number of things.
One source is the periodic media reports and articles with headlines like “Social Security Will Be Insolvent” in 10 or 12 or however many years. If you see that, and you’re maybe 15 or 20 years away from retirement, no wonder you might feel anxious or even panicky.
To relieve that anxiety, let’s take a closer look at the facts behind those headlines. This information will be more technical than emotional, which isn’t my usual approach here but in this particular case I think will be helpful.
Not long ago I read two articles on this topic. (I won’t link to them here, since I am referring to them generally to make a broader point.) One carried a headline warning that Social Security would be bankrupt by 2034. The other said Social Security would have to cut benefits by 2034. Both of them also included the caveat that this would be the case “if Congress does nothing to address the problem.”
The mind-numbing truth is that both of these articles were correct, and both were incomplete. Neither explained that there’s a difference between the Social Security trust fund and the annual income generated through the payroll tax that funds Social Security.
The payroll tax is 12.4% on wages up to 142,800 a year. The employer and the employee each pay half; if you’re self-employed you pay all of it. This is money coming into the Social Security system. Until recently, there was always more coming in than was needed to pay the benefits. That surplus was invested—basically loaned by the Social Security system to the U.S. Treasury. The Treasury gave the Social Security system a note called a bond, then spent the borrowed funds. Just as you might borrow money from your bank, spend it on a car or whatever, and owe a debt to the bank. This has been going on since Social Security started.
Now we have entered a period where more is going out for Social Security benefits than is coming in from payroll taxes. What can we do? Well, we have the trust fund, essentially a savings account that the Social Security system owns. It’s time to start cashing in those bonds to cover the shortfall. In the meantime, if we don’t do something to increase the amount of money coming in—raise the payroll tax, raise the taxable income limit, or increase the retirement age, just to name three possibilities—the trust fund will be depleted in about 12 years. This means the trust fund would be bankrupt, not that the Social Security system would be insolvent. Right now, enough money comes in through payroll taxes to fund around 78% of the amount paid out in benefits. So, if Congress does nothing to address the problem between now and then, it would become necessary to cut benefits by around 25%. Obviously, that would still have a serious impact on many people, but it does not mean all their Social Security benefits would disappear.
That’s one piece of information that hopefully might reduce anxiety about the status of Social Security.
The second thing I want to point out is that Social Security is the retirement plan for the masses. It’s often called a “third rail” in partisan politics, which means it’s something that no one wants to reduce or get rid of. I firmly believe that, at some point, Congress will take action. There are a number of things they can do to fix Social Security that would not be terribly painful. So I don’t think this is something to lie awake nights over.
I would also recommend, especially for those younger than 50 or so, that you adopt a mindset of seeing Social Security as one part of your retirement plan rather than assuming it will be your entire income. Even in its present form, Social Security alone is not enough for many people to live on comfortably. I suggest you avoid both the extreme belief of assuming Social Security will not be there at all, and the opposite extreme belief of depending on it a hundred percent. Instead, take the more balanced middle ground. Invest for your own future, in addition to trusting that some form of Social Security will be available to help you support a comfortable retirement.
Check out The Financial Therapy Podcast by Rick Kahler concerning this topic.