If I had a nickel for every time I was asked this question… well, let’s just say I’d have a lot of nickels.
But I don’t blame people for asking. It’s a good question.
If you watch or read any news at all, then you’ve gotten mixed reports over the years. A dozen stories will warn that Social Security is at risk of collapsing, and another dozen will assure you that your future benefits are perfectly safe.
So, what are we to believe?
In today’s blog post here, I’m going to tell you why I think Social Security really is secure. We’re going to look at how Social Security is funded, why some people believe it’s in danger, and why I tell people that their benefits aren’t going to be taken from them.
But I’ve got to warn you: not everything that I have to say is going to be rosy and reassuring.
How Does Social Security Really Work?
Before Social Security was passed into law back in 1935, retirement wasn’t an option for most Americans. If you didn’t have enough assets to never worry about money again, then you had no choice but to work until you were unable and hope that family would see to your needs for the rest of your days.
Not exactly a great outlook for spending your golden years.
Since 1937, Social Security has been a trust funded by the Federal Insurance Contributions Act (FICA). If you are traditionally employed, then I’m sure you’ve seen the FICA deductions on your earnings.
But benefits paid in those early days weren’t exactly life-changing for retirees. The first person to receive a lump-sum benefit was Ernest Ackerman. He received a whopping 17 cents! According to the SSA’s website:
“The average lump-sum payment [from 1937 to 1940] was $58.06. The smallest payment ever made was for 5 cents!”
Several changes have been made to Social Security over the years. Nearly all of them to improve the funding and the benefits. Today, a percentage of your income goes toward funding Social Security, and your employer matches that contribution.
The Social Security Administration reports having collected over $8.7 trillion in funding and paid out more than $7.4 trillion.
Why Do People Think Social Security Is in Trouble?
There are several reasons. And on the surface, most of them appear to make a lot of sense.
Since 1941, the Social Security Board of Trustees has met to assess the state of the program and its ability to meet demands of American citizens. Recently, the board determined that the fund will be able to pay benefits in-full and on-time through 2034. After that, it gets a little murky.
Under current laws regulating Social Security, the board predicts that the fund will be exhausted in 1934. At that time, FICA taxes will allow the program to continue paying about 75% of the benefits Americans are entitled to receive.
The board also predicts that in order to correct course and avoid this hiccup, benefits will need to be cut by about 13% or FICA taxes will need to be increased from 12.4% to 14.4%.
All of that sounds scary, I know.
Another of the major concerns is our national debt. At the time of my writing this blog post, our national debt is $21.2 trillion. Seriously! Even for a “numbers guy” like me, this is inconceivable. If we were to distribute this debt to every tax-paying citizen of the United States, we would each be liable for over $170k.
What does our national debt have to do with entitlement programs?
Well, sooner or later, we are going to need to address this elephant in our room. And you don’t need a background in economics to know that our rate of spending is simply unsustainable.
Both of these points – the Board of Trustee’s findings and the national debt – are serious problems.
But are they really threats to your Social Security benefit?
Why I Don’t Think We Have Anything to Worry About
Maybe you’re wondering what qualifies me to give an opinion on the future of Social Security.
Let me start by telling you this: unlike the “financial experts” on cable news, I haven’t been called upon to sell headlines. Nor have I ever used arm-twisting fear tactics to sell “hot stock” solutions.
Instead, I have spent my entire professional life focused on one single thing – real-world retirement solutions. In other words, I rely on common sense and take a calm, level headed approach to analyzing retirement issues.
Obviously, I don’t have the “fortune-telling” powers some experts seem to claim in their predictions. I mean, any number of things could happen…
Congress could pass a law tomorrow saying ¡Sayonara! to Social Security.
But let’s be realistic here. For all the strange things our elected officials do, their real motivation is to secure votes. The day Congress allows Social Security to fall into ruins is the day Americans vote them out of office. It just isn’t going to happen – not from any sensible perspective, anyway.
So, while I am not a politician and have never sat in on any closed-door Congressional meetings on Social Security, I am fully confident that benefits will not be taken from those who have paid into the fund.
After all, 2037 is nearly 20 years away. I wouldn’t be surprised if addressing the problem isn’t put off until the eleventh hour, but I do believe a real solution will be enacted. Maybe it will be a compromise – a combination of reduced benefits and increased payroll taxes. Maybe we will look to additional sources of funding. Exactly what the solution will be, no one can say with certainty at this point.
What about the national debt, though?
Yeah, that’s a biggie.
And increased taxes are the only real solution for paying the debt down. Either that or as a country we spend less. I just don’t see that happening.
Like I said earlier though,, they aren’t about to terminate the Social Security program – besides, your FICA tax is entirely separate from your federal income tax.
So, just to reiterate here:
I do not believe that Social Security is in any danger of going away or defaulting on benefits payments – not now, and not in 2034.
However, I warned you that not everything I was going to say today was great news…
Social Security Will Not Secure Your Retirement
At the beginning of today’s post, I said I’d have a lot of nickels if I were given one for every person who asked about the future of Social Security. Well, I would need a dump truck to haul around my nickel fortune if you included all the people I’ve heard say…
“I’ll be alright in retirement. I have Social Security.”
I age a little every time I hear those words. It’s depressing. I want to just put my hands on their shoulders and look them in the eyes and say, “If all you will have is Social Security, you will not be alright in retirement.”
Here in California in 2018, the average Social Security benefit paid to retirees is $1,377.54.
Think about that.
Could you honestly live on an annual income of $16,530? If you’re a Californian receiving the average monthly benefit, that’s what you’re looking at.
Many people wave off the seriousness of the situation by saying, “I won’t have as many expenses when I’m retired?”
Well, that isn’t necessarily true. Even if you own your home and have zero debt, Social Security will not likely be enough to cover the exponentially increasing cost of healthcare. And I don’t need to tell you that the older we get the more healthcare we need.
Even with the Affordable Care Act having expanded Medicare coverage, the costs are becoming increasingly out-of-reach for many Americans. Premiums, copays, and deductibles are all on the rise – not to mention the prescription drug costs.
Last year, average out-of-pocket medical expenses for American seniors, according to Medicare.gov, came to $635/month or $7,620 for the year. And this assumes you’re in great health!
I don’t want to spend any more time here on the bad news of Social Security benefits than I have to. We have enough fear mongering in the morning papers and on cable news. I would rather we took a few small steps toward securing our financial futures so that we can all have more positive conversations about retirement.
Securing Your Own Retirement
Yes, I know. Many Americans close to retirement are uncomfortable thinking about money. And some seem to think that by refusing to acknowledge the problem it will simply go away (it will – until it’s time to retire!).
Here’s the thing…
Social Security isn’t meant to set you up for life in your golden years. Far from it. At best, it is some extra income to supplement your retirement savings.
It is crucial that you assess your retirement needs and plan accordingly. For many people, this can be overwhelming. There are so many variables to consider, and many of which you are likely not even aware.
Here at Milestone Wealth, retirement solutions are what we do. Shoot us an email or give us a call at 714-462-9155.
We will assess your current situation, consider your future needs and goals, and get you painlessly onto the path for a fulfilling retirement.