Is Social Security Secure?
- “People always live forever when there is an annuity to be paid them”
Should You Count on Social Security?
Recently I gave a presentation to a group of employees in a 401k plan that I service. We discussed considerations they should be looking at to determine if they were likely to be able to maintain their current lifestyle in retirement. Social Security along with other sources of income was part of the discussion.
I was again reminded how much angst and confusion there is about the future of the program. Most people apparently are misinformed by the soundbites they regularly hear about the insolvency of the program and don't care to dig much deeper. I acknowledge that the current math of when retirees begin to collect and how much they collect will not work as life spans continue to increase and birth rates decline. However, in my experience those who are not currently collecting Social Security either completely discount or significantly underestimate the program in their future financial calculations.
The Facts on Social Security:
Social Security is funded by payroll tax withholdings. These 6.2% deductions are paid by both employee and employer. Self-employed people pay the entire payroll tax for social security of 12.4%. When you include employee and employer Medicare the amount is 15.3%!
- Social Security payroll tax withholdings are transferred to current retirees – contrary to popular belief individual workers are not accumulating an account balance with the money that has been withheld during their lifetime – rather that money has been distributed to current retirees.
- Up until 2020 the amount employees paid in was greater than what has an accumulated which produced "savings" in the program called the Trust Fund. This fund was designed to collect excess taxes for a day when they will be needed in addition to payroll taxes to pay benefits.
- By current estimates, the “Trust Fund” began to be used in 2020 and will be depleted by 2034. Payroll taxes will only pay for 77% of promised benefits in 2034 and beyond.
- Social Security payroll tax is capped at the first $160,200 of income. Income above that amount is not currently taxed for Social Security but continues for Medicare.
- Full Retirement Age (FRA) is a moving target based on the year you were born. For those born after 1960 it is currently 67 years old.
- You can start Social Security benefits as early as 62 and as late as 70.
- You receive approximately 8% more annually for every year you wait to start collecting.
- Most recipients of Social Security would be better off if they started to receive benefits at the last possible time (70 years old). Despite this, less than 10 percent wait until they turn 70 to take the benefit.
Can it be Saved?
Yes! The younger you are the more likely changes will be significant, but you will likely receive most of the benefits which are currently promised. Modifications to the program which would save it and make it more viable include but are limited to:
- Increased Tax Rate from 12.4% currently (6.2% employee + 6.2% employer) to 14%+
- Increased Full Retirement Age from 67 to 70+
- "Means Testing" - those who are most affluent will receive less benefits
- Raising the cap on social security taxes from $160,200 to some higher number or perhaps eliminating it completely
While Social Security will likely provide some type of benefits (probably 77%+ of what you have been promised) in the future – it’s a source of retirement income out of your control. That’s why it’s important to act in matters you can control. Begin now to save more in 401k plans, IRA’s and taxable accounts. Spend less and pay off debt sooner. Don’t accumulate consumer (credit card) debt! Work with a financial advisor who can help you plan when and how it makes sense for you to claim Social Security benefits and help you know if you need a course correction in order to be financially prepared to retire when you desire.