Social Security is arguably the most important social program for senior citizens. More than three out of five retired workers lean on Social Security to provide at least half of their monthly income, with another third relying on Social Security for virtually all of their income (90% to 100%).
Yet, truth be told, we still don't know a heck of a lot about this crucial program. Last month, MassMutual released its findings from a survey of 1,007 adults, aged 50 and over, from across the United States. Having been asked five true-false questions on Social Security, MassMutual found that close to half (47%) of all survey-takers failed (i.e., answered three or fewer questions correctly). Though this was an improvement over the 62% of pre-retirees who failed in its 2015, 10-question, true-false quiz, it's still not the optimal outcome.
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What you don't know about Social Security could come back to cost you money later in life. Worse yet, what you don't understand about the nation's most important program could perpetuate dangerous rumors that cause you to make claiming mistakes during your golden years.
Fact or fiction: Is Social Security going bankrupt?
One such source of confusion is Social Security's asset reserves, which currently total around $2.9 trillion. These asset reserves are nothing more than the extra cash that the program has built up since it was last overhauled by Congress in 1983. In the previous 35 years, these reserves have grown from virtually nothing to the aforementioned $2.9 trillion.
But something major is happening in 2018, according to the latest report from the Social Security Board of Trustees. After 35 years of being of being cash-flow positive, Social Security is expected to pay out more to beneficiaries this year than it generates in revenue. This is a pattern that's expected to continue in each of the next 16 years. By 2034, per the Trustees, Social Security's asset reserves will be completely gone.
The depletion of Social Security's asset reserves is commonly associated with the program's insolvency. In other words, folks assume that Social Security would be bankrupt without any excess cash in its coffers. In reality, though, this is fiction.
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Social Security has enough money to keep paying beneficiaries for generations to come
Make no mistake about it, the exhaustion of Social Security's asset reserves is no laughing matter. Not having this financial foundation to fall back on could create the need for lawmakers to reduce Social Security benefits for current and future retirees by up to 21%. All of those seniors who lean so heavily on Social Security are bound to feel a 21% reduction in their benefits.
However, running out of Social Security's asset reserves isn't the same thing as the program running out of money.
You see, Social Security currently generates income three different ways: a 12.4% payroll tax on wage income (up to $128,400 in 2018), the taxation of benefits, and interest income earned on the program's asset reserves. Assuming Social Security's asset reserves are depleted, this interest income component could disappear forever. But it ensures that Social Security generates income from its other two funding sources.
The taxation of benefits is a relatively small contributor to Social Security, having generated $37.9 billion of its $996.6 billion in income last year. Nevertheless, as time goes on, the taxation of benefits is expected to contribute more to Social Security. That's because lawmakers haven't adjusted the income thresholds to which this tax applies since it was introduced in 1983. If one-half of your Social Security income, plus your wage income, totals more than $25,000 as a single taxpayer, or over $32,000 as a couple filing jointly, you'll owe federal tax on at least some of your Social Security benefits. If this tax threshold remains static, more seniors should be paying tax on their benefits with each passing year.
More importantly, Social Security's payroll tax revenue would remain firmly in place, short of congressional action. Last year, net payroll tax revenue totaled $873.6 billion. Even without Social Security's asset reserves, this 12.4% tax on wage income of up to $128,400 would continue to collect revenue for the program -- and the Social Security Administration could disburse this revenue to eligible seniors, the disabled, and survivors.
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It's time to adjust your expectations
With this being said, it's time to adjust two likely misconceptions about Social Security.
First, it's time the American public realized that Social Security isn't going anywhere. Yes, its asset reserves could disappear in an estimated 16 years, and yes, a benefit cut is looming if lawmakers fail to act. However, workers of all ages should expect the program to be there in some capacity when they retire. While that benefit may not be as robust as what their parents or grandparents received, it's still a lot better than receiving nothing.
It's also time for working Americans to fully understand how Social Security can help them during retirement. According to the Social Security Administration, the retired worker benefit is only designed to replace about 40% of the average workers' wage income. Relying on the program to replace a significantly higher percentage of your wage income could prove to be disastrous with a potential benefit reduction of 21% looming in 2034.
Ultimately, the time for action is now. It's time for working Americans to budget, save, and invest for their futures such that Social Security becomes only a minor source of income during retirement. It's also time for lawmakers on Capitol Hill to stop sweeping Social Security's issues under the rug. Even though it's not going bankrupt, that's no reason to turn a blind eye to a plain-as-day problem.
