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Is Social Security Really Running Out of Money?

By Maurie Backman - Jan 28, 2020 at 6:08AM

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Many Americans are worried that it is.

Millions of retired seniors today collect Social Security, and for many, those benefits serve as their main source of income. But last year's Trustees Report shed some unfavorable light on the state of Social Security's finances. Specifically, it reported that the program's trust funds are expected to run dry in 2035. As such, many working Americans and retirees alike are under the impression that Social Security is running out of money. But is that actually what's happening?

Why is Social Security on shaky financial ground?

There are a number of factors working against Social Security at present. First, workers are exiting the labor force at a faster rate than those who are entering it. The result? The program is on the hook to pay more money in benefits than it takes in. Additionally, seniors are living longer these days, which means they're also collecting more benefits in their lifetime. That's a good thing for retirees, but a bad thing for a program with limited financial resources.

Social Security card

Image source: Getty Images.

Now let's get back to Social Security's trust funds. Right now, those funds can be tapped to bridge the gap between what Social Security owes in benefits and the revenue it takes in. But many fear that once those funds are exhausted, benefits will no longer be payable.

Thankfully though, that's not true, and the reason is this: Social Security gets the bulk of its revenue from payroll taxes. Currently, wages of up to $137,700 are subject to a 12.4% Social Security tax. The tax is split evenly between employees and employers, though self-employed workers pay the whole thing. As such, Social Security is not at risk of running out of money, because as long as we have a workforce and continue taxing wages, the program will have revenue coming in.

Should you sit back and depend on Social Security then?

Not exactly. While Social Security isn't going broke, it may need to cut benefits once its trust funds run out of money. As of last year's projections, seniors are potentially looking at a 20% reduction in benefits once those funds are depleted, assuming Congress doesn't step in with a fix.

But a potential reduction in benefits isn't the only reason you shouldn't bank too heavily on Social Security. The other reason is that those benefits aren't designed to sustain seniors in the absence of outside income. The average recipient today collects just over $1,500 a month, or $18,000 a year. That's hardly enough money to buy you a comfortable lifestyle.

In fact, you should expect Social Security to replace about 40% of your pre-retirement income if you're an average earner, but most seniors need around twice that amount of income to live reasonably well. As such, you should make every effort to save for your senior years in a dedicated retirement plan, or line up an additional income source, like a part-time job, so you're not overly reliant on Social Security. The program may not be running out of money, but it certainly isn't equipped to fund your retirement by itself.

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