According to the June 2017 snapshot from the Social Security Administration, nearly 61.5 million people were receiving a monthly benefit check, of which 68.2% were retired workers. Of these 41.9 million retirees, more than 60% count on their Social Security to be a primary source of income. That's huge, and it demonstrates just how important Social Security is for current and future generations of seniors.
Is Social Security doomed?
Of course, as you're also probably aware, the program isn't on the best footing. A number of demographic changes are expected to wreak havoc on Social Security and throw its future into limbo. These include the retirement of, on average, more than 10,000 baby boomers per day, which is pushing the worker-to-beneficiary ratio lower, and the lengthening of life expectancies, which has allowed seniors to pull a benefit from the program for an extended period of time.
The result, according to the latest Social Security Board of Trustees report issued last month, is that benefits could be slashed for current and future retirees by up to 23% in 2034 should Congress fail to act. It's not exactly the best outlook for a program that means so much to our nation's retirees.
But there's an even more glaring figure to most Americans: Social Security asset reserves. The Trustees report predicts that asset reserves could touch $3 trillion by 2022, implying the program is expected to remain cash flow positive through 2021. However, beginning in 2022, and each year thereafter through 2091, Social Security will be paying out more in benefits than it's generating in revenue, resulting in a $12.5 trillion cash shortfall between 2034 and 2091.
Social Security's bankruptcy is almost certainly a myth
Some Americans view this imminent cash shortfall as the end for Social Security -- especially millennials. When surveyed in 2014 by Pew Research, 51% of millennials believed that Social Security wouldn't be there for them when they retired. Thankfully, though, this worry turns out to be nothing more than the program's most pervasive myth.
Social Security will almost certainly be there for many future generations of retirees for one key reason: the payroll tax.
The payroll tax is a 12.4% tax on earned income between $0.01 and $127,200, as of 2017. This maximum taxable earnings figure often increases on par with the Wage Index. Also, it's worth noting that most workers only pay 6.2% of their earned income into Social Security, with employers picking up the tab on the remaining 6.2%. In other words, as long as people keep working, the payroll tax will keep getting collected, generating income for Social Security to disburse to eligible retirees. Since the payroll tax comprised a whopping 86.4% of income collected in 2015, there should still be plenty for the Social Security Administration to disburse. Unfortunately, this doesn't mean that current payment levels are sustainable, which is why the Trustees are suggesting cuts could be imminent within two decades.
This is the only way Social Security could possibly go bankrupt
Of course, when we're talking politics, we can never say anything with 100% certainty. While Social Security currently can't go bankrupt thanks to the payroll tax, legislation on Capitol Hill could always change that.
Earlier this year, a Republican lobbyist had tinkered with the idea of reducing or eliminating the payroll tax in its entirety, according to Fox News. Assuming the average household generates about $50,000 in income annually, and that most people work for an employer, we're talking about an average of $3,100 in extra income in the pockets of households each year. Since we're a consumption-driven economy, this extra cash could fuel spending or bolster personal saving and investment. At least that's the idea on paper.
The reality of the plan is that it would potentially end the primary source of funding for Social Security. Interest income only provided 10.1% of revenue in 2015, with the taxation of benefits kicking in another 3.4%. If payroll taxes are eliminated, Congress would need to find a way to generate at least $800 billion in annual income. One idea floated around was a value-added tax (VAT) on consumption, which is purportedly capable of generating $12 trillion in revenue over the next decade. However, a VAT could also reduce consumption, and it makes revenue generation very lumpy given natural economic cycles and the regular occurrence of recessions and economic slowdowns.
In short, it's not a very good idea, in my opinion. However, if Congress were to move forward with a plan to reduce or eliminate the payroll tax, then, and only then, would it be possible for Social Security to go bankrupt.
A silver lining, but you need to remain proactive
Breathe a sigh of relief, folks, because Social Security isn't going anywhere. If there is a silver lining, it's that you will receive income during retirement, as long as you're eligible.
Nevertheless, the Trustees report serves as a genuine wake-up call that working Americans need to turn their attention to saving and investing in order to reduce their reliance on Social Security. After all, Social Security is only designed to replace about 40% of your working wages, but quite a few seniors are leaning on the program for much more.
This all starts with formulating a budget and saving more. The May personal savings rate was a paltry 5.5%, per the St. Louis Federal Reserve. Financial advisors suggest saving 10% to 15% of your paychecks if you want to retire comfortably, and the only way to do so is to better understand your cash flow. Formulating and reviewing a budget can often be done in around 30 minutes each month, and it can be done online, making it easier than ever to save money.
Likewise, even though the stock market goes through bouts of volatility, it's shown time and again that it's among the best wealth creators over the long term. Historically, the stock market has appreciated at a pace of roughly 7% per year, inclusive of dividend reinvestment. Proactively saving more and investing wisely is a good, but simple, formula to reduce your reliance on Social Security once you retire.