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Social Security Is Not Going Bankrupt, but Don't Count on It Anyway

By Maurie Backman – Feb 16, 2020 at 8:36AM

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Benefits should be around for a long time -- but don't take too much comfort in that.

There are many rumors that Social Security is on the verge of bankruptcy, and that it won't be able to pay benefits to seniors in the not-so-distant future. The good news, however, is that these rumors are much exaggerated.

The reality is that while Social Security is facing some financial issues, it's by no means going broke. The program's trust funds, which it relies on when its financial obligations exceed its incoming revenue, are set to run out of money by 2035. At that point, beneficiaries could face a 20% reduction in their Social Security income -- unless, of course, Congress intervenes. But that's a far cry from bankruptcy, to say the least.

Five Social Security cards laying on top of each other


In fact, Social Security really can't go bankrupt because it gets the bulk of its income from payroll tax revenue. The Social Security taxes you pay on your earnings are used to fund the program, and while most of us probably grumble about them, they're what's keeping benefits alive. As such, the program can continue to operate even if its trust funds are whittled down to nothing.

Still, you really shouldn't count on Social Security too heavily in the course of your retirement planning -- not because the program is at risk of disappearing, but because it generally won't suffice in keeping you afloat financially as you might expect it to.

You can't live on Social Security alone

Social Security pays the average senior today around $18,000 a year. Chances are, that's not enough income to cover all of your bills at present, or as a senior.

As a general rule, you should expect your expenses in retirement to amount to about 70% to 80% of your living costs during your working years. If you own a home that's paid off prior to retirement, that percentage might come in a little bit lower. But to be clear, you'll generally need income outside of Social Security to maintain a comfortable lifestyle, and that's where personal savings come in.

The problem, however, is that many workers neglect their nest eggs, thinking they'll fall back on Social Security instead. And that's why you really should convince yourself not to rely on Social Security. If you tell yourself you may not get benefits, you'll be more motivated to save on your own.

How much savings should you attempt to amass? Some experts will tell you to aim for 10 times your ending salary. But if that's not possible, do the best you can. If you're 50 years old today and want to retire at 67, which is your full retirement age for Social Security purposes, starting putting $500 a month into an IRA or 401(k). If your investments in that account generate an average annual 7% return, which is certainly doable if you load up on stocks, you'll wind up with $185,000. To be clear, that's not an enormous amount of money in the context of retirement savings, but it's certainly better than nothing.

Furthermore, if you're 50 years old with a target retirement age of 67, and you're able to cut back on expenses and perhaps boost your income with a second job so that you're contributing $1,000 a month to retirement savings, you'll wind up with $370,000 in 17 years, assuming that same 7% return.

If you're younger, you have an even greater opportunity to save for the future. Case in point: If you're 37 years old with 30 more years of work ahead of you, and you put $500 a month into a retirement plan that generates an average annual 7% return, you'll end up with about $567,000.

Though Social Security is by no means at risk of going bankrupt, counting on it as your sole or even primary source of retirement income is a big mistake. The sooner you realize that, the sooner you can take steps to save on your own and avoid financial struggles during your senior years.

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