Young or old, it's important to understand Social Security. The program guarantees a minimum level of income for retired workers, and it also provides benefits for the spouses and children of retired and deceased workers (as well as disabled people of all ages and their spouses and children). The program is funded by payroll taxes, which are taken out of workers' paychecks. Social Security is especially important for low-income retirees, who may not have other sources of income in retirement.
The History of Social Security:
The Great Depression was a catalyst for Social Security, as millions of Americans were unemployed and penniless at the time. Social Security was famously created in 1935 as part of Franklin D. Roosevelt's New Deal program, intended to reform the US economy (the musical Annie has a lighthearted take on this, but the message is largely accurate).
At that time, many Americans were struggling to make ends meet, and there was no safety net for those who could not work. Elderly people were particularly in need; charities couldn't keep up, and adult children often were unable to support the burden of dependent aged parents.
President Franklin Roosevelt responded to this need with the Social Security Act. It was passed to provide welfare for Americans in their golden years (and, in a way, to protect their children from poverty). Although created to ensure that older Americans had enough money, Social Security has been expanded over the past century to include disability and other benefits. The program was designed to be funded by payroll taxes, which remains one of the most effective ways to provide financial security for all Americans.
What Does Social Security Look Like Today?
In 2022, Social Security provides benefits to 64 million Americans. While there have been changes to the program (including the rates of payroll taxes), the fundamental goal is the same: to support Americans in retirement. Seniors make up 77% of Social Security recipients.
Social Security is perhaps the most successful government program in American history. It forms an essential part of our social safety net. It is also one of the most effective antipoverty programs ever devised, and the largest of its type in the world.
The Insecure Future of Social Security:
However, Social Security is facing financial challenges in the future, thanks in part to an aging population and longer life expectancies. The number of retirees is increasing, while the ratio of workers paying into the system is decreasing. This means that the Social Security Trust Fund will run out of money eventually. Congress will need to take action to ensure that Social Security remains solvent in the future.
For years now, we’ve been hearing about the impending doom of Social Security. And that rainy day is sooner than you might think.
According to the Social Security Administration, the Trust Fund will be depleted by 2034. If no changes are made, this means future recipients could face an estimated 22% reduction in their benefits. If that happens, Millennials may miss out on up to $675,000 in Social Security benefits across the lifetime of their retirement, and those currently receiving benefits could see a cut of $5,000 per year.
The Sun’ll Still Come Out Tomorrow
The good news is that there are steps Congress can take to shore up Social Security and ensure it’s available for future generations. There are several potential solutions, including increasing the eligibility age, cutting benefits, or raising payroll taxes. The sooner they act, the less painful those steps will be. Here are a few scenarios that could play out:
- Congress acts and resolves the funding shortage – In this case, everything stays much the same as it is now. Social Security benefits continue as normal, and retirees can rest easy.
- Congress does not take action and the Trust Funds run out – In this scenario, benefits would have to be cut or even eliminated. This would be a devastating blow to retirees who rely on Social Security for most of their income.
- Some combination of the two – In this case, benefits could be cut, but not as drastically as in the second scenario. There is also a possibility that taxes could go up to help cover the shortfall.
Whatever solution is ultimately chosen, it will be important to ensure that Social Security remains financially sustainable in the long run, so that this essential program continues to help seniors and other vulnerable populations to live secure and dignified lives.
What Can I Do Right Now to Secure My Own Retirement?
No matter what happens in Washington, try to have a retirement plan that doesn’t rely solely on Social Security. If you have other sources of income–a pension, savings, investments– you’ll be in a much better position. There are several things you can do to be able to retire comfortably, even if Social Security benefits are reduced in the future.
- First, take advantage of employer-sponsored retirement plans, like a 401(k), 457, or Roth IRA. If your employer offers matching contributions, contribute enough to get the full match. This is free money that can go a long way towards a comfortable retirement.
- Second, start saving. The sooner you start, the more time your money has to grow. Even if you can only afford a small amount each month, it all adds up. Investing in a diversified mix of stocks and bonds can help you reach your goals while minimizing risk and lessening the impact of inflation on your life savings.
- Third, consider working a little longer. Working even just a few extra years can make a big difference in your retirement income. Not only will you have more time to save, but you also may receive a larger Social Security benefit. We've discussed elsewhere why you should hold off until Full Retirement Age to start collecting your benefits, but it's worth repeating: if you start taking Social Security early (62), your benefits will be reduced by up to 30%. So, if you can manage it, working a few extra years makes a lot of sense. Delaying until 70 can add up to 32% in increased benefits over-and-above your full benefit.
With sensible retirement planning, you can be prepared for whatever changes come to Social Security. Someone aged 35 and earning 100K, can make up the shortfall of a 20% reduction in their Social Security benefits with an extra $33/week (inflation-adjusted) in contributions across their career if they work until full retirement age. For someone earning 50K, it's only $22/week.
Don't Delay—Start Planning Today.
If you're worried about what might happen to Social Security in the future, it's a good idea to consult with a financial planner. A fee-only planner can help you create a plan that ensures you’ll have enough money to live comfortably in retirement, even if benefits are reduced.
We can also help you make the most from your retirement savings options, like employer-sponsored plans and investment portfolios.
If you're ready to get started, we can help. Schedule a free initial 30-minute consultation with us today. And check out our Retirement Planning ebooks for more helpful tips on preparing for retirement.