Social Security card


Knowing that the government will send you monthly checks during your retirement years gives you such a warm and fuzzy feeling. That's why the idea that Social Security might run out of money or disappear altogether is so disturbing. But is that really something you need to worry about?

Social Security myths

First off, consider some of the myths surrounding Social Security and how it's financed. Many people have a hazy notion of some huge Social Security savings account with funds earmarked for each retiree. In reality, Social Security is a pay-as-you-go program, meaning that the money Social Security pays beneficiaries comes from taxes that today's workers are paying to the government. The Social Security taxes that come out of your paycheck each month aren't for you at all; they're mostly being paid out to someone who's retired today.

So what are people talking about when they blast Congress for raiding the Social Security trust fund? Here's the story. While the baby boomers were working (and paying those pesky Social Security payroll taxes), there was more money flowing into Social Security than there was flowing out to pay retirees, because the baby boomer generation is so much larger than the ones before and after it. So, the government tucked away those extra taxes into trust funds. Congress has indeed taken money out of these funds to finance other government programs, but it left an IOU in its place that will later be paid, most likely by tax increases or government budget cuts.

But here's the sticky part: Baby boomers are now in the process of retiring, so this bulge in the population graph will be taking money out of Social Security instead of putting money in. Many people worry that the payroll taxes Social Security collects won't be enough to finance this abnormally large pool of retirees, and that the system will break down as a result.

The reality behind the Social Security shortfall

Technically, this could indeed break Social Security. If Congress did nothing to fix the problem, then eventually the extra money in the trust fund would run out, and the government would no longer be able to pay out benefits at the current rate. In reality, though, it's highly unlikely that the federal government would just sit on its hands and let Social Security crash and burn. After all, there's a simple fix to this problem: Raise payroll taxes, reduce Social Security benefits, or (most likely) do a little of both. It's just a matter of making sure the money going into Social Security matches the money coming out of it. For perspective, the Social Security Administration reports that it has enough money in the trust funds to pay full benefits until the year 2034, even if nothing changes, and that a 2.66% increase in payroll taxes would be enough to cover the predicted shortfall.

So should you worry that you won't receive Social Security benefits? When you hit retirement age, you'll almost certainly get something, but it might be a slightly smaller amount than you expect based on the Social Security statement you get every year. But consider that even if you got your full expected benefits, they probably wouldn't be enough for you to live on. The maximum Social Security benefit is a measly $2,639 a month, and the average benefit is an even measlier $1,341 per month. Take a look at the aforementioned Social Security statement and ask yourself if you could live comfortably on that much money.

If the answer is no, which it probably will be, there's a simple fix for that, too: Set aside enough money in retirement accounts to supplement your Social Security benefits. Remember, you don't need enough in there to cover all of your expenses in retirement; you just need enough to cover what Social Security won't.