Of the various myths surrounding Social Security, perhaps the most feared is the notion of the program completely going broke. And it's not a completely baseless concern. Social Security is facing some serious financial problems that, if left unaddressed, could impact benefits in the future. But to think that Social Security won't have any money left at all is a complete misconception.
Social Security's shaky path
For the time being, Social Security should manage to keep chugging along -- paying out benefits to enrollees while investing any leftover money it collects in its trust funds to grow its assets. The problem, however, is that the program is on track to start paying out more in benefits than it collects in revenue as early as 2022.
Why the shift? It boils down to the fact that more people are exiting the workforce than entering it, thereby producing a revenue gap. The fact that beneficiaries are living longer also plays a role in the program's impending shortfall.
Now remember, the program does have its trust funds to tap when the revenue it collects can't match the amount needed to pay benefits. But according to recent estimates, those trust funds are set to run dry by 2034, at which points recipients may see as much as a 23% reduction in their benefits. And that's going to be a hard pill for seniors to swallow.
But all is not lost
Still, there's a major different between Social Security cutting benefits and not paying benefits at all. And there's really no reason to believe that we'll end up looking at the latter over the former.
The thing to remember about Social Security is that the bulk of its revenue comes from payroll taxes. So unless that payroll tax is removed, the program itself will remain standing.
That said, we can't discount the possibility of benefits getting cut in the future, even though it's in lawmakers' best interest to implement a solution to avoid that type of scenario, and even though we still have a good 16 years to worry about what that solution might be. Therefore, while you can expect Social Security to be around for you whenever it is you retire, your best bet is to save independently for a number of reasons -- first, to compensate for whatever benefits reduction you might face, but more importantly, to account for the fact that you can't live on Social Security alone to begin with.
Right now, the average recipient collects $1,404 per month, or $16,848 per year. And that's hardly enough to cover the numerous bills seniors tend to face. In fact, even in a best-case scenario -- meaning, no future benefit cuts -- Social Security will only replace about 40% of your pre-retirement income. Most people, however, need double that amount to live comfortably once they stop working and collecting a paycheck, so if you want a shot at a financially secure retirement, you'll need to take matters into your own hands.
The good news? If you save steadily and consistently throughout your career, and invest your savings wisely, you stand to retire with enough of a nest egg to not only make up for the limited buying power Social Security gives you but also compensate for a potential benefits reduction in the future.
Case in point: If you were to set aside $500 a month for the next 40 years and invest that money at a 7% average annual return, which is a bit below the stock market's average, you'd wind up with roughly $1.2 million to your name. And that's a good way to buy yourself the retirement you've always dreamed of, with or without Social Security.
Though Social Security's financial future is somewhat precarious, we should all have a little faith in the program nonetheless. If you paid into the system, know that it will be there for you in some capacity when it's your turn to collect benefits, even if that doesn't happen for many, many years.