Will Social Security be there for me when I retire?
“On a winter’s day in early 1940, a 65-year-old woman opened the front door of her house in Ludlow, Vermont, and went to her mailbox. Her mailbox was just outside the door, and she reached up to open the lid to retrieve the delivered mail. She’d done it many times, but this was no ordinary trip. The minute she opened that mailbox and picked up its contents, she automatically became a part of American history and lore (though she would not have realized it at the time). When the retired schoolteacher and legal secretary opened the envelope, she became the recipient of a check issued to her by the United States Government. Numbered “00-000-01,” it was the very first Social Security check. It wasn’t a big check—certainly not by modern-day standards—but it was made out to the amount of $22.54, and it was welcome.
That woman’s name was Ida May Fuller. She had only been retired three years by the time she went to that mailbox, and the check she held in her hand was the result of an act approved by the Congress of the United States and it was an act that was signed into law on this date—August 14th—by President Franklin D. Roosevelt, in 1935. As members of the press and photographers recorded this monumental event of the New Deal, the president took note of the significance of this moment to applaud the Congress for approving this legislation, and to remark that what they did was a “patriotic act.”
One of the great parts about my job is getting to hear how different everyone’s life story is. From their upbringing, to their goals and personal situations, everybody is different. But if there’s one part of the financial planning process where virtually everyone has the same outlook, its Social Security. When it comes time to discuss potential sources of retirement income and I mention Social Security, clients usually say something to the effect of:
“Well, we’re out of luck there aren’t we?”
It’s a reasonable reaction. According to the 2019 Social Security trustees report, assuming no further action, the Social Security trust fund reserves will be depleted in 2035. For those of us planning for retirement in the next 10+ years that is obviously a troubling statistic. After a lifetime of paying into the system, some of us may find ourselves retiring right as the well runs dry. Let’s take a quick look at the system today, focus on what changes can be implemented to prolong the program, and how you should plan for the future.
Social Security today
When the Social Security system was created in the 1930’s, it was meant to help older Americans avoid poverty in old age, provide income for disabled workers, and assist survivors of deceased breadwinners. It was never intended to be a panacea for a retirement plan. Yet, Social Security has become the major source of income for most of the elderly. Here are some stats from the Social Security Administration:
- In 2019, roughly 64 million Americans will receive over one trillion dollars in benefits
- Nearly nine out of ten individuals age 65 and older receive Social Security benefits.
- Social Security benefits represent about 33% of the income of the elderly.
- Among elderly Social Security beneficiaries, 48% of married couples and 69% of unmarried persons receive 50% or more of their income from Social Security.
- Among elderly Social Security beneficiaries, 21% of married couples and about 44% of unmarried persons rely on Social Security for 90% or more of their income.
- Coming right on their heels, roughly 10,000 baby boomers are reaching the age of 65 every day for the next 10 years and will start collecting their benefits. Add those up, and the almost 3 trillion dollars in the Social Security trust fund is estimated to be depleted sometime around 2034. So does that mean all of us paying in for all these years are out of luck?
It’s not as bad as you think
Not exactly. When most Americans hear that Social Security is going to run out, they assume the funds are just going to go away. Remember, Social Security is funded by payroll taxes which are collected through withholdings every time you receive a paycheck. Even if the Social Security trust fund is exhausted in 2034, the payroll tax should still be able to cover about 3/4 of the Social Security benefits meant to be paid out each year. While it would be terrible for some retirees to see a big cut in their monthly Social Security check, the benefits do not completely disappear when the trust runs out.
There are ways to make the system solvent
In recent years, numerous proposals have been talked about or proposed in Washington that would extend the solvency of the trust. Some of them include:
- Slowly raising the full retirement age up from 67
- Raising Social Security payroll tax
- Eliminating cost of living increases at a certain income
- Lowering benefits through means testing of higher income beneficiaries
- A combination of all of these
For those of you too young to remember, Congress has already made changes to Social Security before by raising the retirement age slowly back in the 1980’s. Even with the current political gridlock in Washington, hopefully they can come together and make changes that can extend the program which can benefit all Americans.
To be safe in retirement planning, assume reduced benefits or none at all
Even if there are solutions to fix the system and we give the benefit of the doubt to Congress to implement them, it’s still a good idea to stress test your retirement plan when looking to the future. Just like you might look at what your reduced benefits might be at 62, delaying benefits until 70 etc., you should look at what a 25% cut in benefits does to your overall plan. If you really want to be aggressive, assume no benefits at all. Would this derail your retirement plan? If so, should you plan to adjust your spending? Work longer? Save more? It’s good to play it safe when planning for retirement.
Assuming lower returns on your investments, spending more than you think in retirement, and planning unexpected life events should be a baseline for your future plans. Even though the Social Security system is not quite as flawed as most think and can be fixed with legislation, it’s a good idea to play it safe and plan for a reduced amount of future benefits in the future or even none at all. Doing this can only set you up to have a more successful retirement, regardless of how the system ends up looking in the coming decades.