Social Security is a reliable, important source of income for retirees. Unfortunately, many future workers are buying into a myth about this benefits program. This misconception could affect their retirement plans -- and potentially lead them to make some bad decisions in the future.
You don't need to fall for falsehoods about Social Security, so here's the truth about this retirement program.
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Here's the myth millions of Americans are falling for
According to the Transamerica Center for Retirement Studies, as many as 70% of current workers are afraid that Social Security is not going to be available to them.
This is not a huge surprise, since every year there is frightening news from the Social Security Trustees. These program administrators warn that the Social Security trust fund is in jeopardy of running out of funds in a little over a decade. This can make people incorrectly believe that no money will be available to provide them with their promised benefits.
But, if the trust fund does run out of money, that doesn't mean what most people believe. This source of funds is not the only place Social Security gets cash to pay out benefits, and it isn't necessarily even the most important. The bulk of Social Security money actually comes from revenue collected from current workers and their employers.
For every dollar a worker earns up to an annual wage base limit (which is $147,000 in 2022), the employee pays a tax of 6.2% on their wages and their employer pays another 6.2%. This means a ton of money is collected from the millions of people who are working every day. This money will always come in steadily (unless the funding for the program changes) and it's enough to pay out about three-quarters of promised benefits.
Now, it may not be ideal that future retirees risk a benefit cut of around 25% if the trust fund does run dry. But that's the worst-case scenario -- not getting nothing, as many people fear. And since Social Security is such a popular program, the most likely result if the trust fund does run out of money is that lawmakers step in to save it somehow.
Does this mean you can count on Social Security?
So the good news is that you're absolutely going to get most of the benefits you're expecting. But the bad news is that this is not going to be a sufficient source of retirement income to cover all your costs. And that's true even if you don't face a 25% benefits reduction.
Social Security is meant to be one of several retirement income sources, and it should combine with a pension and savings to provide you with the money to support yourself. It replaces around 40% of pre-retirement income, and you'll likely need about 80% or more of what you were earning to maintain your living standard. Since most people no longer have a pension, the rest of the money will need to come from savings.
So don't worry that Social Security will run out -- and make sure you don't make misguided decisions based on this myth, such as claiming benefits early because you fear you won't get any otherwise. But do make sure you're realistic about what Social Security can do for you and that you save money to supplement it so you can have the retirement you deserve.
