Will Social Security Be There for You?

You pay dearly for your promised Social Security benefits. Between your own contribution and your employer's contribution on your behalf, 12.4% of the first $117,000 of your earned income gets sent to Uncle Sam as a tax to pay for that program.

Source: Social Security Administration.

Despite that substantial tax rate, the program is in financial trouble. Its own trustees estimate that by 2033 its trust funds will empty and it will only be able to pay about 77% of expected benefits. Those same trustees estimate that it would take a tax rate of about 17.1% of covered payroll to cover Social Security's costs in 2035, rising to 18.2% by 2088. 

What that means to you

In a nutshell, Social Security's trustees are making it abundantly clear that the program is not sustainable as is. Without changes, the already expensive benefits it provides will either become much more expensive to fund or get cut substantially.

Chances are strong that Social Security will survive but will look somewhat different from how it does today. If history is any guide, Congress will likely tinker around the edges with some combination of tax hikes and benefit cuts in order to shore up the system. Here are a few past and proposed adjustments that have affected, or may affect, the program.

Tax hikes
Over Social Security's history, total tax rates -- including the employee and employer parts -- have risen from 2% at its inception to the current 12.4%.  The earned income subject to Social Security tax has increased as well, to $117,000 from $3,000 when the program began. Even adjusting for inflation, that income cap has more than doubled.

A combination of tax hikes and benefit cuts
In 1984, Social Security benefits became subject to income taxes. Today, up to 85% of your Social Security check can be subject to income taxes if you have sufficient total income levels. A large portion of those taxes go to help shore up Social Security's trust fund, and the rest go to shore up Medicare. In essence, these taxes cut the net benefits received by many Social Security recipients.

Benefit cuts
While Social Security's benefits are indexed to inflation, there are serious doubts that the inflation gauge used in that index truly measures the higher inflation rate experienced by seniors. Additionally, there's a proposal that surfaces from time to time to use a chain-weighted inflation index to slow that inflation adjustment even further.

What can you do about it?

Remember that even if nothing changes, Social Security is still on track to pay out about 77% of its expected benefits once its trust funds empty. It's the other 23% or so that is primarily at risk. Chances are that the shortfall will be covered by some combination of tax hikes and benefit cuts, as it has so many other times in the past when Social Security was at risk of not meeting its obligations.

With that as the backdrop, you should figure out how to invest your money now to cover the cost of the next patch when it does get implemented. After all:

  • If tax rates go up, it's a lot easier to cut back on investing to cover those taxes than it is to cut back on your living expenses in response to a tax hike.
  • If benefits get cut, it's a lot better to draw money from your nest egg than it is to be forced to cut your living expenses in response to a benefit cut.
  • If some other solution is found that doesn't either raise taxes or cut benefits, then the money you save by preparing for those other outcomes remains yours to enjoy.

The thing about investing, though, is that the more time you put into it, the better your odds of success. You still have about 19 years before the Social Security trust funds are expected to empty. Get started now, and you'll substantially improve your prospects.

How to get even more income during retirement
Social Security plays a key role in your financial security, but it likely won't be enough on its own. In our brand-new free report, our retirement experts give their insight on a simple strategy to take advantage of a little-known IRS rule that can help ensure a more comfortable retirement for you and your family. Click here to get your copy today.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 17, 2014, at 12:27 AM, dusty10x wrote:

    Trash article....Half of the 12.4% is paid by the employer.....You only need a huge raise in taxes if you sit and do noting for the next 20 years......All you have to do "now" is raise Soc.Sec. payroll tax 1% each for worker and employer and we are cover for at least the next 75 years.......The only reason it has not been done yet is because it would just add to a "huge surplus" that the government would just spend and leave more I.O.U.'s. Stop the doom articles..Any more benefit cuts for future retirees is unacceptable...Social Security is in the best shape of any program in the United states..What other program is guaranteed paid in full for the next 20 years? Shut up and stop promoting cuts for future workers that make no sense............


  • Report this Comment On August 17, 2014, at 2:04 AM, TMFBigFrog wrote:

    Dusty --

    The Social Security Trustees indicate that the program's 75-year actuarial deficit is 2.88% of taxable payroll, and that the number increased due to the passage of time. I'm not seeing how you can get from there to "huge surpluses" from adding 1% to each half of the tax.

    Also, don't forget that your employer sees the Social Security tax it pays on your behalf as part of the compensation expense it pays for you. It isn't going to just "eat" the cost of a higher tax, it'll pass it on to you in the form of lower raises.

    Additionally, I'm not sure where it looks like the article is "promoting cuts for future workers". It did point out key tax hikes (paid for by workers) and benefit cuts (paid for by recipients) that the program has seen and that have been proposed, but it wasn't really advocating for anything other than to prepare yourself for more of the same...



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Chuck Saletta

Chuck Saletta has been a regular Fool contributor since 2004. His investing style has been inspired by Benjamin Graham's Value Investing strategy. Chuck also can be found on the "Inside Value" discussion boards as a Home Fool.

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