Will Social Security Be There When You Retire?

Lewis Walker |

If you query the Internet as to when the Social Security Trust Fund will run out of money, you get a variety of answers. Estimates range from 2033 to 2041. Consider a current posting on the Social Security website, ssa.gov. “The Social Security Board of Trustees now estimates that based on current law, in 2041 the Trust Funds will be depleted.” That’s only seventeen short years away and the oldest Gen Xer will be age 61, and most likely deep into retirement planning. So what happens to Social Security benefits if Congress keeps kicking the can down the road?

The Social Security Administration notes that “people are living longer and the birth rate is low, (and) the ratio of workers to beneficiaries is falling. Therefore, the taxes that are paid by workers will not be enough to pay the full benefit amounts scheduled. However, this does not mean that Social Security benefit payments would disappear. Even if modifications to the program are not made, there would still be enough funds in 2041 from taxes paid by workers to pay about $780 for every $1,000 in benefits scheduled.” That’s a 22% cut in benefits.

Data shows that about half of the American population aged 65 or older lives in households that receive at least 50% of their family income from Social Security benefits. About 25% of senior households rely on Social Security for at least 90% of their family income. Any cut in benefits will hurt! Even now, for a person who worked for his or her entire adult life at average earnings and retires at age 65, Social Security benefits replace only about 37% of past earnings. Social Security was never intended to be a living!

Many people do not understand the workings of the Social Security Trust Fund. They think that their payroll taxes are held “in trust” for them in real assets and then the funds are used to pay them income when they retire. Actually the funds that you pay in are paid out to current retirees and what is held for you is essentially an “IOU,” a promise to pay you a future income stream based on a variety of variables. Here’s how the Tax Policy Center, sponsored by the Urban Institute and Brookings Institution,   explains it, objecting to suggestions that the trust funds are “not real.”

“Social Security trust funds are real and hold real Treasury securities for which the federal government has an obligation to pay. They reflect any accumulated excess of Social Security taxes plus other revenues, such as interest received, over expenditures. At the same time, the trust funds ‘fund’ only a portion of outstanding obligations. The trust funds are invested in special-issue Treasury securities backed by the full faith and credit of the federal government.”

But here’s the rub, where the cat gets let out of the bag. Continues the Tax Policy Center: “The trust funds are not a free lunch for taxpayers. Money from the general fund used to repay debts to the trust funds cannot be used for other purposes, like building roads or providing for national defense. And as an additional outlay for the government, those general fund payments increase the Treasury’s need to borrow from the public, increasing federal deficits and adding burdens on future taxpayers.” So do we continue to run up gargantuan deficits ad nauseam, raise Social Security taxes, increase the age for full retirement benefits to say, age 70, currently pegged at age 66 t0 67 depending on your date of birth, or all of the above? No matter what, somehow you will help to pay the piper as a taxpayer, beneficiary, or both.

From a financial planning standpoint, a better solution is to work toward financial independence and self-sufficiency so that Social Security when you get it , regardless of the monthly benefit, is a “high side plus.” The money can be used for travel, taking grandchildren on trips, hobbies, and increased donations to your house of worship, charities, and other philanthropic endeavors.

Starting early in life with consistent investments in wealth-building channels like an IRA, a 401(k), or other retirement planning tools, as well as a growing investment portfolio outside of your retirement plans, will set you on the road to wealth and self-sufficiency. Invest in assets likely to grow over time in excess of inflation and taxation, in diversified stock portfolios, and real assets such as real estate, private equity, etc. Understand risk/reward tradeoffs and use a professional financial advisor to help create a road map. Own a home versus renting. Have a budget and do not pay interest on credit card debt. Use all debt prudently. Build your own business with growing value if you have entrepreneurial aptitudes. Pay your taxes on time but use a CPA in sync with your financial advisor to limit tax liabilities using lawful strategies. Carry adequate levels of insurance–life, health, disability, and umbrella liability−so that life’s setbacks don’t result in financial ruin.

When married and retired, you get two Social Security checks. When your spouse dies, you only get one check, but it will be for the higher amount of the two checks received prior to the passing of your loved one. But you would like for that to make no difference in your lifestyle or options as a survivor. No widow or widower wants to be a burden on the children. You want to be able to afford the best when you or your loved one needs care, a nursing or senior living facility, for example. Comprehensive financial planning starting early in life is the best approach to “senior security” and the blessings of choice!