The State of Social Security

Social Security is a critical topic for most people.  Retirees and pre-retirees are counting on the income that it provides, and younger generations have convinced themselves they won’t have Social Security when they retire.  With all the preconceived notions and false information surrounding Social Security in general, we wanted to set the record straight.

Let’s start off by debunking the myth that Social Security is broke, Social Security is far from broke.  At the end of 2016 the program had $2.85 trillion in reserves.  Even if no more payroll taxes were collected, Social Security could continue to fund the current benefits for roughly three more years.  Luckily, we don’t have to worry about that because we’re all still paying payroll taxes, so much so that Social Security was able to pay out $922 billion in benefits last year and still have $35 billion left to add to the reserves.  These surpluses are expected to continue for the next five years as well, but after that is when things start to get a little tricky.

With the baby boomer generation quickly approaching retirement and increasing life expectancies we are going to hit a point where Social Security benefits outpace the payroll taxes being collected on workers; It’s anticipated that this will happen in 2022.   Over time the deficit will only continue to grow and in 2034 Social Security will run out of its reserves.  While this isn’t good, it is far from a reason to panic.  Payroll taxes will continue to exist, and should cover 3/4 of Social Security benefits.  How the government plans to address this is still yet to be seen but there are likely three possible outcomes.

The first potential fix for Social Security is to cut benefits by 25% to keep benefits roughly equal to the amount of payroll taxes being collected.  This seems unlikely with so many people counting on that income to live, couple that with President Trump vowing to not reduce benefits and it seems like that might be the odd man out.  The other two options are raising taxes to generate more income, and cutting benefits another way such as raising the full retirement age (which has already happened once).  Interestingly enough, people would prefer to be taxed more than have their potential benefits cut, or be forced to retire later.

So, all in all Social Security isn’t as doomed as people would have you believe, but the demographics are leaning against it. Things like this happen from time to time and are out of our control. This is why it is very important to maintain as much flexibility as possible in retirement and have a plan to understand what changes like this may mean to your retirement goals.

*Statistics provided by Matthew Frankel’s article “How Safe is Social Security”