Why I'm Not Counting On Social Security, and Neither Should You

When a group of Americans was polled this summer, 76% supported the idea of taxing those earning more than $400,000 in order to expand Social Security benefits. Fully 54% "strongly" supported the idea, including 66% of Democrats and 50% of Republicans.

While most Americans want greater Social Security benefits in their future, the current reality is that there's a chance of benefits being decreased. The smart move for most of us these days is to hope for an increase, but prepare for a decrease.

Image source: Getty Images.

Social Security is facing problems

Here's the main problem: Social Security works because it collects taxes from working people and uses that money to pay retired workers their benefits. That has been a great design for many decades, but the ratio of workers to beneficiaries has been shrinking. Check it out:

Data source: Social Security Administration. 

Many headlines suggest that Social Security is "going broke" and imply that it might not pay out benefits any longer, but that's not the case. According to the 2022 Social Security Trustees Report, the current Social Security surplus will be depleted by 2034. That's the point at which incoming dollars won't cover outgoing obligations. It doesn't mean beneficiaries will get nothing, though -- they'll just get less than the benefits to which they're entitled. The latest estimate is that they'd receive around 77% of what they were entitled to. That's definitely bad, but it's not 0%.

Social Security's problems are fixable

Here's some good news, though -- there are multiple ways to eradicate that shortfall, and with enough fixes applied, benefits may even be able to increase.

For example, you've probably noticed that you're taxed for Social Security in every paycheck. Most workers currently pay 6.2%, and their employers contribute an additional 6.2%, for a total of 12.4%. (Self-employed people have to pay the entire 12.4% themselves.) If that 12.4% tax is increased, more money will flow into Social Security coffers. Some have proposed hiking that total tax rate to 14.8% (7.4% for workers) over time, and there have been other proposals, too.

Another proposed fix is taxing more of higher earners' income for Social Security. You may not realize this, but we're only taxed for Social Security up to a certain income level, which gets adjusted regularly. It's $147,000 for 2022, meaning that every dollar you earn up to $147,000 will be taxed for Social Security, but any dollars earned beyond will not be taxed.

So someone earning $147,000 and someone earning $12,147,000 will contribute the same sum into Social Security. In other words, lower-income earners get taxed on all their income, while wealthier folks only get taxed on part of their income. Some have proposed initiating a tax on incomes above $400,000, while others argue for taxing all income.

These kinds of proposed fixes can shrink or eliminate the looming shortfall, and if robust proposals are acted on, benefits may even be increased.

What to expect from Social Security

For now, though, we can't plan on the system being fixed. There's a good chance it will be, since it's so important to so many and lots of politicians are well aware of that. But the smart thing to do is to hope for the best while preparing for the worst.

If you're not already saving and investing for your retirement, you should do so. (Start with a solid retirement plan.) If you are already saving and investing, take some time to make sure you're on a path to end up with what you need. Otherwise, you might need to start saving and investing more. It's also not a bad idea to let your representatives in Washington know what you think about bolstering Social Security.

In the meantime, know that the average monthly Social Security retirement benefit check was recently about $1,666 -- roughly $20,000 per year. If you've earned more than average, you can expect more than that, but not that much more. Higher earners might collect $40,000 per year, or a bit more.

I expect that we will get all that we're due from Social Security when we retire, but I can't count on it -- and neither should you.