Contrary to what some might believe, the average American's Social Security benefit won't disappear when the OASI Trust Fund dries up. Photo: Social Security Administration.
The importance of Social Security to our nation's retirees can't be overstated. A 2015 report from the Social Security Administration (SSA) estimates that $0.39 of every dollar that retired Americans draw on for their living expenses comes from the program.
While some Americans believe the program is so underfunded that it will no longer be around when they reach retirement, that's not the conclusion the SSA's board of trustees has reached. In fact, at the end of 2014, the program had $2.73 trillion in reserves.
It is true that this multitrillion-dollar trust fund for Old Age and Survivors Insurance (OASI) -- what many people recognize as "Social Security" -- is expected to run dry by 2037.
But that doesn't mean there won't be payouts. Here's what the trustees have to say:
Taxes will be enough to pay for only 75 percent of scheduled benefits [when the Trust Fund runs dry]. This increase in cost results from population aging, not because we are living longer, but because birth rates dropped from three to two children per woman. Importantly, this shortfall is basically stable after 2035.
There are several crucial pieces of information in here, but none more so than this: Even if Congress does nothing to address this shortfall, and all projections prove correct, retirees will retain 75% of their benefits.
Should we be relieved that the worst-case scenario isn't as bad as some fear, or worried that this 25% drop represents crucial income? There are as many answers to that question as there are recipients of the program.
What could it mean for you?
It's impossible to offer a crystal-clear picture of what this shortfall could mean for every potential reader -- and trust me, I've tried to come up with a sound bite that can capture it all. Instead, the best we can do is get a ballpark figure of what a Social Security shortfall may look like.
In January, the average retirement benefit, including payments to spouses and children of retired workers, was $1,298, which amounts to $15,600 per year. If benefits were reduced by the anticipated 25% today, the average OASI benefit would drop to $973.50 per month, or $11,700 per year.
Here's the headline number: Benefits would drop by an average of $3,900 per year.
How can you prepare to cover that gap?
There's no way to cover all the ways you could prepare for such a shortfall in just one article, but I can offer some basic ideas.
First, we use the 4% rule for safe withdrawals to get an idea for how much more we'll have to save to offset this benefit cut. The average OASI recipient would need another $97,350 ($3,900 x 25 years) in their nest egg -- in today's dollars -- by the time they retired.
If you start cutting back on unnecessary spending right now -- no matter your age -- and investing the difference, you could make up this difference quicker than you think. For instance, a 35-year-old couple who invests just $50 per month in the stock market (and earns the average historical return) would make up the difference by age 65.
Furthermore, there's also a contingency of people who have been saving and investing assuming that Social Security won't be around at all come retirement time. Even though they will probably be wrong about that, it hasn't hurt them financially; they'll be unaffected by cuts.
But for the vast majority -- those who still have their most basic needs met -- I'm assuming there's a huge, underappreciated factor that will help out: our ability to adapt. As British author Tom Holt once said, "Human beings can get used to virtually anything, given plenty of time and no choice in the matter whatsoever."
In the end, if you're young enough, you actually have a say in the matter. If not, my humble opinion is that we'll all probably adjust.
