2 Reasons Social Security Isn't as Unreliable as You Think

If you see the scary headlines that many articles sport regarding Social Security, you might think its coffers will run dry soon, leaving you with no retirement benefits. Take a deep breath -- because that's not going to happen.

Here's a look at two reasons why Social Security isn't going to run out of money anytime soon (or not so soon) and why your benefits aren't in as much danger as you may think they are.

Image source: Getty Images.

1. It's not going to run out of money

Remember that Social Security operates by taking in money from workers (mostly via a payroll tax that you'll see deducted from your paycheck), and paying out benefits to retirees. In the past, there were gobs of workers for every retiree, so plenty of money was coming in and it was more than sufficient to pay obligated benefits. The program ran a surplus; it has reserves. Well, people are living longer these days, and many are retiring earlier, and American demographics have been changing. Check out the worker-to-beneficiary ratio over time:

Source: Social Security Administration. *Estimated

Clearly, there's a problem. The latest report from the Trustees of the Social Security and Medicare trust funds note: "The Old-Age and Survivors Insurance (OASI) Trust Fund, which pays retirement and survivors benefits, will be able to pay scheduled benefits on a timely basis until 2034, the same as reported last year. At that time, the fund's reserves will become depleted and continuing tax income will be sufficient to pay 76% of scheduled benefits."

So there is bad news, and significant bad news. If you were planning on scraping by on your Social Security income alone in retirement, that would have been hard even without these looming problems. The recent average monthly benefit for retirees was just $1,557, or about $18,700 annually. If you were to receive only 76% of that, it would be $1,183 per month, or about $14,200 annually. That kind of cut can be catastrophic for millions of retirees, but it's still much better than nothing.

Image source: Getty Images.

2. The program can be strengthened

Here's some good news, though: While Social Security reserves are on track to become shortfalls, that doesn't have to happen. There are multiple ways that the program can be strengthened -- and even made stronger than ever. For example:

The payroll tax for Social Security can be increased

The current payroll tax for Social Security is 12.4% -- salaried workers pay half, 6.2%, and their employers pay the other half. Self-employed people pay all 12.4% themselves. The Congressional Research Service has estimated that increasing the rate from 12.4% to 13.49% would eliminate 66% of the expected shortfall.

The earnings cap can be raised -- or eliminated

As of 2021, only the first $142,800 of your earnings are taxed for Social Security. That means that 94% of Americans are taxed on all their earnings, while the 6% with higher earnings get a tax break. (If you earn $1,142,800, for example, $1 million of your earnings go untaxed for Social Security.) The Congressional Research Service, in a report updated in September of 2020, notes, "... due to increasing earnings inequality, the percentage of aggregate covered earnings that is taxable has decreased from 90% in 1982 to 84% in 2017."

It adds: "... the Social Security Administration's Office of the Chief Actuary (OCACT) estimates that phasing in an increase in the taxable maximum (for both contributions and benefits bases) to cover 90% of covered earnings over the next decade would eliminate roughly 20% of the long-range shortfall in Social Security. OCACT's estimates also show that if all earnings were subject to the payroll tax, but the current-law base was retained for benefit calculations, the Social Security trust funds would remain solvent for over 40 years."

There are other proposed ways to fix Social Security, too. All we need is our representatives in Washington to agree to a strategy. If you care about this issue, let your representatives know.

Save and invest

Finally, remember that recent average monthly Social Security retirement benefit of $1,557? If you don't think that kind of income will be enough in your retirement, you'll probably want to be saving aggressively and investing effectively for retirement while you're still working, to build a nest egg to complement your Social Security benefits. Take some time to figure out how much you'll need for retirement, then come up with a plan to get there, and then stick to that plan.