Will Social Security Be There When You Retire?
I read something recently that illustrates one of the challenges facing Americans saving for retirement. A 2014 Pew Research survey found most Americans, including Millennials, Gen Xers and Baby Boomers, lack confidence that they’ll receive their promised Social Security benefits in their entirety.
Of course, these worries are understandable. According to the 2014 report by the Social Security and Medicare Boards of Trustees, the Social Security trust fund will be depleted by 2033. The reason is largely one of demographics: As the Baby Boomers continue to retire and collect benefits, the number of beneficiaries is growing faster than the number of workers paying into the system. It’s not surprising that many younger workers tell me that they don’t expect to get a nickel from the system their payroll taxes are working to support.
So is Social Security likely to be there for you when it’s time to retire? Read on.
A System Built to Last?
Social Security gets money to pay benefits in three ways: through taxes on current workers, through taxes on the benefit payments, and through interest income on a trust fund of about $2.8 trillion (as of the end of 2014). Those funds are invested by the Department of the Treasury in special non-marketable treasury bonds that are issued and guaranteed by the “full faith and credit” of the federal government.
Although the amount of benefits currently being paid exceeds the amount of revenue coming in from collected taxes, the interest from these bonds has enabled the Trust Fund to maintain a surplus that is projected to continue until 2021. After that, the shortfall will be made up by taking money directly from the reserve itself. Even with this, the Social Security program isn’t likely to end. Payroll taxes will still be coming in, which will enable Social Security to pay approximately 77 percent of scheduled benefits until at least 2082.
Of course, fixing the problems with Social Security is a political land mine, especially with the presidential election a little more than a year away. Some policymakers have suggested reducing benefit levels, increasing taxes or a combination of the two. Other possibilities include pushing the full retirement age to 70 and lowering benefits for wealthier Americans.
Planning for Contingencies
If you are in your 50s or older, you probably have less to worry about when it comes to receiving your promised benefits. Social Security, which has never missed a payment in its 80-year history, still has “gas in the tank.”
However, if you’re decades away from retirement, the picture is a little murkier. Odds are you can look forward to Social Security, albeit at a potentially reduced level – that is, unless Congress steps in to fix the system soon.
While the lingering uncertainty surrounding Social Security can make it challenging to plan for the future, you still need to move forward. Here are two suggestions that can help.
First, understand the importance of Social Security to your retirement income plan. Your financial professional can help you stress-test your retirement plan by modeling your strategy different ways: with Social Security at current levels, at 75 percent and 50 percent of current levels; and without Social Security at all. If you find that the lifestyle you envision for retirement isn’t doable without full benefits from Social Security, you may want to boost your savings level or dial back on some of your plans.
Second, consider what other sources of lifetime income you might use to supplement your Social Security benefits come retirement. Apart from pension benefits and Social Security, an income annuity is the only source of guaranteed income that will last throughout your retirement, no matter how long you live.*
Finally, think carefully before taking your benefits prior to reaching full retirement age. Regardless of the steady drum beat of Social Security fears, none of the proposals for fixing the system will give you a higher benefit if you claim early. Instead, understand your options so that you can maximize whatever Social Security benefits you’ll have in the future.