A majority of Americans -- 54% -- are worried about not having enough money in retirement, according to a 2017 survey by Gallup. Social Security, designed to replace about 40% of pre-retirement income for average earners, will be a major help for most retirees. Indeed, the majority of elderly beneficiaries get 50% or more of their income from Social Security, while 23% of married elderly beneficiaries and 43% of unmarried ones get fully 90% or more of their income from it, according to the Social Security Administration.
Given all that, it's no surprise that many people wonder just how safe Social Security is.
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When it comes to how safe Social Security is, there's both good and bad news. First, though, here's a bit of background information on this critical program.
Meet Social Security and its trust fund
Social Security pays close to 62 million Americans, with benefits totaling $955 billion in 2017. About 42 million recipients are retirees collecting retirement benefits (others are dependents of those retirees, disabled workers and their dependents, and survivors, including children).
Here's how Social Security works: As you might have noticed on your paycheck, workers get 6.2% of their wages withheld as a Social Security tax. What many don't realize, though, is that their employers cough up a corresponding 6.2%, for a total 12.4% tax on earnings. (Unfortunately, those who are self-employed have to pay both the employer and employee portions, forking over the entire 12.4% on their own.)
Some people assume that the money they pay into Social Security goes into an investment account with their name on it, growing until they're paid from it in retirement, but that's not how it works. Instead, the money that you and about 167 million other people pay into the Social Security system is used to pay the benefits owed to current beneficiaries. For a long time now, there has been more money coming in than going out, so the process proceeded smoothly, with the surplus funds going into the Social Security trust fund.
The "Social Security trust fund" term actually encompasses two funds: The Old-Age and Survivors Insurance (OASI) Trust Fund and the Disability Insurance (DI) Trust Fund. Managed by the Department of the Treasury, they permit our government to contain assets collected and to keep track of inflows and outflows. There's a board of trustees who watch over the trust funds and who report to Congress annually on their condition. By law, funds are spent only on benefits and administration, and assets in the funds are invested only in securities guaranteed by the U.S. government. The Treasury makes "special issues" available solely for the trust funds. They differ from traditional marketable Treasury securities by being less vulnerable to changes in value due to overall market conditions. In other words, these investments are structured so that they never lose value. They generate interest that can be used to pay benefits and they can be redeemed or sold over time, too.
Many people misunderstand this process, and some people (including some politicians) mischaracterize it, suggesting that the government is borrowing from, or "raiding" the Social Security trust fund. To help you see why that's not fair, consider this: If you invest in U.S. bonds, you're giving the government money, and the government is promising to pay back your investment at a certain time (when the bond "matures") and to pay you interest, too. You're lending money to the government, and the government is borrowing from you -- and rewarding you, too. It's not raiding your bank account or stuffing suspect IOUs into your pocket. The Social Security trust fund, like you, is simply investing money and is receiving interest along the way, too.
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The good news: Social Security isn't disappearing
Another common misconception about Social Security is that it's going broke soon, and retirees won't be receiving any checks from it then. For example, 50% of Gen Xers and 51% of Millennials said they believed they would receive no Social Security benefits at all by the time they're ready to retire, according to a 2014 Pew Research Center survey. That's not likely to be the case --though the program does face some challenges.
When Social Security was created, and for many decades afterwards -- through today -- there were more Social-Security-tax-paying workers than beneficiaries, and that kept the system flush with funds. But as people have been having fewer children and living longer, the contributing-workers-to-beneficiaries ratio has been falling. Back in 1950, the ratio was 16.5, with about 48 million workers supporting close to three million beneficiaries. As of 2013, it was just 2.8 -- and it's expected to hit 2.1 by 2035.
Thus, while the Social Security trust funds have been running a surplus in every year since 1984 -- meaning that they took in more money than they paid out -- the surpluses are shrinking and likely to stop around 2020. All is not lost then, though. At that point, the Social Security system can rely on incoming interest payments to make up the funding deficit -- for a while. According to several government estimates, Social Security funds are likely to see their reserves run dry between 2033 and 2037 if no changes are made. If that happens, payment checks won't disappear, but they'll likely shrink by about 25%.
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More good news: Social Security can be shored up and made safer
There's a reasonable chance that changes will be made, though, which could strengthen the program -- as most Americans would like to see that. A survey by the National Academy of Social Insurance (NASI) found that: "72% [of respondents] agree we should consider raising future Social Security benefits in order to provide a more secure retirement for working Americans. 77% agree that it is critical to preserve Social Security benefits for future generations, even if it means increasing Social Security taxes paid by working Americans, and 83% agree it is critical to preserve Social Security benefits for future generations, even if it means increasing taxes paid by top earners."
What changes, then, might be made to shore up Social Security? There are many possibilities. For example, it's been estimated that fully 77% of the trust funds' shortfall could be eliminated by increasing the Social Security tax rate for employers and employees from its current 6.2% to 7.2% in 2022 and 8.2% in 2052. This wouldn't be the first tax increase. The tax rate was increased in 1983, in order to bolster the program ahead of many Baby Boomer retirements.
Another possibility is taxing all of each worker's income, instead of just the first $127,200 of it. Many don't realize it, but there's a cap on how much of our earnings are taxed for Social Security -- for 2017, that cap is $127,200 -- and in 2018 it will be $128,700. Most of us are taxed on all our income, but those lucky enough to earn, say, $1,127,200 in 2017 will pay no Social Security tax on a million dollars of their income. Eliminating the earnings cap over a 10-year period, so that all of us are taxed on all our income, is estimated to be able to wipe out 71% of the trust fund shortfall.
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The bad news: Social Security faces threats
All is not rosy and safe, though, when it comes to Social Security's future. The Republican party is currently in charge in Washington, and many GOP leaders are interested in shrinking Social Security instead of strengthening or expanding it. Here are some of the changes might they pursue:
- Increasing the "full" retirement age at which retirees can begin collecting their full Social Security benefits. (Starting to collect earlier, as early as age 62, or later, up to age 70, will reduce or increase those benefits checks, respectively.) Right now, it's 66 for many people and 67 for those born in 1960 or later. Some Republicans are calling for the full retirement age to be hiked to 68, 69, or even 70. It's true that Americans are, on average, living longer than they did decades ago, but a later retirement age will still mean a shorter retirement for many people -- and fewer benefits paid to them, too.
- Basing cost-of-living adjustments for benefits payments not on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) but instead on the "Chained CPI," which is more conservative. The Chained CPI assumes that consumers, when faced with a big price increase in one item, will look for cheaper substitutes, and it would result in smaller cost-of-living adjustments for beneficiaries.
- Cutting back benefits for those wealthy enough to not need them so much. This won't be popular with wealthier Americans, who could argue that they paid into the system so should benefit from it. But it would remove many people from the pool of beneficiaries, saving money.
- Privatizing Social Security. Many in the GOP would like Social Security fully or partially privatized. This could take various forms, but one might feature Americans put in charge of investing retirement funds for themselves, perhaps through an investment company -- not unlike how they manage their 401(k) accounts. Its downsides include the fact that many people are not very financially savvy and may not do well managing these vital funds, and that an economic downturn could whack many people's retirement coffers.
Since Social Security is to vital to so many of us, it's smart to know more about it and to keep up with developments regarding it. For example, know that the average monthly Social Security retirement benefit was recently $1,375, which amounts to $16,500 per year. If your earnings have been above average, though, you would collect more than that -- up to the recent maximum monthly Social Security benefit for those retiring at their full retirement age, which was recently $2,687. (That's about $32,000 for the whole year.)
There are strategies you can use to get the most out of Social Security. You might also want to make sure your representatives in Washington know whether you'd like them to protect or strengthen the program.
