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What Happens When Social Security's Trust Funds Run Out?

By Maurie Backman - Jun 24, 2018 at 9:13AM

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Hint: Benefits won’t go away completely.

If you read the latest Social Security Trustees Report, you're aware that the program's combined trust funds are expected to run dry in 2034. And clearly, that's not great news. But before you start panicking about your benefits, it's important that you understand the implications of those trust funds running out.

Social Security won't go broke

The most important thing you should know about Social Security's trust funds is that they're not the program's primary source of funding. Rather, the bulk of the revenue that Social Security takes in comes from payroll taxes.

Social Security card


Now for the first time in multiple decades, Social Security is dipping into its trust funds, and will most likely continue to do so for the next 16 years. The reason is that workers have been retiring at a relatively rapid pace, and we're not getting enough replacement workers to allow the program to take in as much money as it needs to pay out. However, once those trust funds are depleted, Social Security will continue to have access to its primary income stream, which means that in a worst-case scenario, future benefits will be cut, not eliminated.

How much of a reduction are we talking about? Based on the latest projections, come 2034, recipients might lose 21% of their benefits if Congress doesn't step in with a fix. And obviously, that's a pretty harsh blow for those who depend on those benefits to provide the majority of their income. But if you're years away from retirement, you can take steps to compensate for the potential benefits cut you might face, thereby ensuring that you don't end up struggling financially.

You need savings of your own

One major myth associated with Social Security is that seniors can live off their benefits alone. Well, the truth is that they just plain can't. Even if benefits aren't cut in the future, those payments will only replace about 40% of the typical worker's pre-retirement income. Most seniors, however, need more like 80% of their former earnings to pay the bills in retirement. Therefore, if you're still working, you should be taking savings matters into your own hands regardless of what happens to Social Security down the line.

If your employer offers a 401(k), that's certainly a good place to start. At present, you can contribute up to $18,500 annually to a 401(k) if you're under 50, or $24,500 if you're 50 or older. This means that if you're 50 years old and don't have a dime at present, maxing out your 401(k) until age 67 will leave you with roughly $755,000 in retirement savings provided your investments generate an average annual 7% return during that time (which is more than doable with a stock-focused strategy). And that, combined with whatever Social Security ends up paying you, could make for a pretty comfortable retirement.

Of course, not everyone has the ability to max out a 401(k), nor do all workers have access to one. But even if you're only working with an IRA, whose current annual contribution limits are $5,500 for workers under 50 and $6,500 for those 50 and over, or a lower savings threshold due to personal circumstances, you can still amass a sizable sum if you save consistently for many years. In fact, contributing $400 a month over 17 years will leave you with $148,000, assuming that same 7% average annual return. Now, that's not a ton of money, but it could be enough to help fill the gap where Social Security leaves off.

No matter what happens to Social Security, there are two things you need to take away here: The program is not going bankrupt, and it also won't be enough to sustain you in retirement even if benefits don't get cut. And the sooner you start establishing your nest egg, the greater your chances of covering your expenses as a senior, regardless of what your benefits ultimately look like.

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