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Will Social Security Really Run Out?

It’s true the Trustees Report contains disheartening estimations for the future of Social Security and those who rely on it for their income in retirement. One of the best ways to prepare for the future state of the program is to understand what the numbers mean, and how and if they might change when you retire.

How Social Security Receives Funds

First, it’s important to know Social Security has two sources of money: a designated payroll tax (Federal Insurance Contributions Act, or FICA) that the current workforce pays into each year and a trust fund that is built up using any surplus money not paid out in benefits each year. Within Social Security there are two separate reserves: one that pays out for disability insurance and one for old age and survivors’ benefits.

The idea that Social Security is running out comes from the calculations that, at the current collection and withdrawal rates, the disability insurance reserve will run out in 2032 and the old age and survivors’ benefits in 2034, resulting in Social Security’s combined trust fund running dry in 2034. This impending threat of insufficient funds is caused by a shrinking workforce contributing to Social Security and a growing population of retirees making withdrawals.

A Cut in Benefits

It’s understandable that hearing about the trust fund drying up would cause a rumor that eventually Social Security benefits will cease all together—but remember, the program will still receive revenue from FICA taxes. What a depleted trust fund does mean is a cut in benefits.

How big this cut in benefits will be is the biggest—and most real—concern. The latest projections, based on the Trustees Report, estimate a reduction of 21 percent by 2034 if no changes are made to the program by Congress. Another way to look at it is Social Security will only be able to pay 79 percent of combined scheduled (i.e., needed) benefits: 96 percent of disability benefits and 77 percent of old age and survivors’ benefits. By 2089, benefit coverage is expected to shrink to 73 percent.

That means a more than 20% cut in benefits for retirees, who may be depending on Social Security for their primary source of income if they did not prepare for this shortfall with their own retirement investments.

Options for the Future

There are steps Congress could take to avoid the impending deficit: increase FICA taxes paid by both employers and employees (this represents the smallest change possible to fix the problem) or increasing the age at which people begin collecting benefits and reducing the program’s benefits to future recipients (thereby avoiding the 21% cut in benefits to those already in retirement who don’t have the opportunity to build up their own retirement investments).

How to Prepare for a Comfortable Retirement Regardless of the Fate of Social Security

It was always a myth that seniors could depend on Social Security for all of their income needs. Social Security payments only ever replaced around 40% of the average worker’s pre-retirement income, while most seniors need at least 80% to pay their bills. Thankfully, regardless of Congress’s action regarding the future state of Social Security, there are steps those still in the workforce can take to make their retirement income more secure and sufficient.

The safest and surest plan is to save independently now with the goal of reaching that 80% mark of your current income on your own, without the assistance of Social Security. The key to any successful retirement savings plan is to start early and make saving a priority. The later you start saving, the more you’ll need to save each year as you won’t be reaping the benefits of interest accumulating and compounding over time.

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