Welcome back, this week we continue our discussion on retirement myths with one I’m sure you’ve all heard. Social Security is a topic that has a huge role in retirement so I’d be remiss if I didn’t include the biggest myth out there about it.
I can't count on Social Security, I will have to fund my own retirement.
Millions of U.S. workers pay Social Security taxes each year and expect to be able to get rewarded by doing that when they retire and claim their benefits at some point in their retirement. However, while the number of people who currently get Social Security is far more than the number of people currently paying into the program, that doesn’t mean Social Security is going away. In fact, I believe strongly that it will continue to be an important part of the financial planning process.
The Social Security Administration frequently publishes data on the levels of their reserve funds used to pay out current retirees. Many, and I mean many, people believe that this is a doom and gloom report and it can certainly seem that way based on the way the message is delivered. It typically goes something like this: “The Social Security Administration estimates that the program’s trust fund reserves will be depleted by 2035 and taxpayer funds will only be able to cover 80% of the benefits scheduled to be paid.” With a message like that no wonder many retirees and pre-retirees feel they cannot depend on Social Security and believe they will have to fund their own retirement without help from the infamous government program.
On the surface, it is true that Social Security’s reserve funds will “run out” by 2035. However, the bulk of the benefits will still be able to be paid by taxpayers. In fact, if Congress sees its way to adjust the structure of the program by that fated year through actions like tax increases or benefit reductions, or even some other action, they could still be equipped to make full benefit payments.
So what happens if funds were to be depleted? I’ll answer this question although I don’t believe it will happen. However, to humor things for the sake of the fearful, if Social Security trust funds were to disappear, it would result in reduced benefits for future retirees. That’s right, if you are already retired you can breathe a sigh of relief. But, not to worry Social Security will still be there for future retirees too, although perhaps at a 25-30% reduced rate based on current projections.
The good news is, as I mentioned above, Congress has the authority to make adjustments to the program to ensure its long-term sustainability, such as raising the payroll tax rate or changing the retirement age. The other good news is that this isn’t the first time that the Social Security trust funds were projected to run out and recovered regardless. In 1983, Congress faced a potential fund shortage but quickly made changes that helped replenish those reserves.
Why the constant fear of a failing Social Security system? Well, likely because of the way the program is structured. The Social Security program was established during the Great Depression. The way it is structured requires the number of workers paying Social Security taxes to remain higher than the number of current retirees. I’m sure you can guess the rest, but here it is. Baby Boomers are the most populus generation and they are currently, for the most part, in retirement now. However, the birth rate declined after the baby boom which means that the number of workers currently in the workforce and paying Social Security taxes is less than the number of people currently in retirement. This skews the ratio the program relies on - more workers working than in retirement.
With this being a fact that needs to be dealt with, the structure of the program will need to be changed. Don’t worry, like we said earlier, Congress has made changes in the past and will likely continue to do so to keep the program viable. This is good news because Social Security is one leg of the three-legged stool of retirement income which will be discussed in more detail in the coming months.
Until next time…
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