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Social Security…Yes There Should Be Money For You

A lot of people don’t think they will ever collect any money from Social Security, 60% of all non-retired adults by some counts.  That’s an enormous dollop of skepticism.  I’m all for conservative retirement planning and budgets and don’t think anyone under 50 should assume they will receive the full benefits projected in the personal statements the Social Security Administration mails out or estimates for you on line.   However I think people are overestimating the risk when they assume they will collect little or nothing.  Give this can effect your thinking when you decide when to retire, it is worth some examination.

budgets, retirement planner and personal finance blog
If you are worried, you are in good company.

If I had to guess, I’d say it is because people have some false perceptions that lead to the following narrative… (a)  The government has been taking my money all my life to invest for me and pay me back during retirement.  (b) Instead of holding it they spent it.  (c) Now they will have to cancel the program before I can collect.  There are factual inaccuracies reflected in this narrative.

Social Security is not and never has been like a 401K where they take and hold your money for you to give back later, even though some politicians have used the term “Trust Fund”.  The Social Security Act was signed by FDR in 1935, taxes were first collected in 1937 and the first distribution to retirees was made that month.  Regular monthly benefits commenced three years later in 1940.  The program is and always has been “pay as you go”.  The Social Security tax we pay right now is available to be used to pay people retired right now.  The grain of truth is that for quite a long time the program has run a surplus, more tax money coming in than was needed to pay the level of benefits the program specified at that time, and Social Security has built up a sizable cash reserve that is often referred to as a “Trust Fund” as a result.  Nonetheless the tax income has always been much more important to the program than the reserve.

There are some realities we have to account for when retirement planning today though.  According to the Social Security Trustees report, assuming no changes in tax rates or benefits, by 2020 they expect to be running a deficit against their reserve not a surplus.  Mostly this is because the ratio of retirees to workers has shifted in the wrong direction.  So unless the payroll tax is increased, by 2033 they expect the deficit to run down the accumulated cash reserve, at which point tax income will only be enough to cover about 75% of the current benefits through 2087.  This suggests that for most of us, 75% of the benefit we would get under current policy is a pretty reasonable planning assumption.

So, what are the odds of getting less than 75%?  I couldn’t put a number to it, but in the realm of the realistic I think one of the following would have to happen:

  • The program and the payroll tax would have to be cancelled for political reasons, meaning we  don’t want it any more.
  • The program is changed to include a means test, in other words maybe people with less money get more at the expense of people who have more money getting less.

I think the second is more likely than a first, but that neither are especially probable unless you are a very high net worth individual.  I also think the current benefits could possibly end up being maintained indefinitely via a payroll tax increase but that’s nothing I would bet on either.

It is reasonable to conclude that the most likely outcome is a gradual reduction in benefits over time where current retirees are unaffected, but anyone in their 40s or younger receives about three quarters of what we are currently being told to expect.  That said it’s a good idea to have a plan you can live with that allows for the possibility of less and to know what you would do in the unlikely event of receiving no Social Security benefit at all.

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