More than 65 million Americans receive Social Security benefits of some sort, and the program pays out over $111 billion every single month. Despite how large and important Social Security is to so many people, the program is in serious trouble. According to its own trustees, the program's combined trust funds are expected to run out of cash by 2035. In the absence of a fix between now and then, that would cut the program’s ability to pay retirement benefits by more than 20%.
Of course, Congress is likely to patch Social Security before that day of reckoning arrives, as it has so many times before. Despite the likelihood of a patch, however, I'm not counting on Social Security benefits for my retirement. Frankly, if you sit back and think about it a bit, you probably shouldn't count on it either.
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Why it really is different this time
Structurally speaking, Social Security's fatal flaw is that it is a "pay as you go" type of program. Although your benefits are based on your salary history over time, your payments into the system aren't actually reserved for you. Instead, they largely go to pay the benefits of those currently receiving checks.
That worked OK back in 1945, when there were 41.9 workers for every beneficiary. Thanks to longer life expectancies, however, that ratio is now closer to 2.8-to-1. That's a key reason the program's tax rate has skyrocketed from 1% when Social Security started to 12.4% (half paid by employees, half paid by employers) today.
On top of those massive tax rate increases over time, Social Security taxes were originally taken out only on your first $3,000 of salary. Today, your earnings subject to that tax is $160,200. Even accounting for inflation, that combination works out to more than 12 times the tax rate on nearly three times the earnings.
As the population continues to age, that ratio of workers to beneficiaries is expected to continue to drop -- to 2.3-to-1 by 2030, and as far as 2-to-1 over time. That demographic reality combined with its pay-as-you-go structure is why Social Security continues to have funding troubles despite its substantially higher taxes over time. Unless there's an adjustment to that fundamental structure, chances are strong that it will continue to struggle over time, no matter what the next patch looks like.
Even when it's working, what exactly do you get?
According to Social Security, the average retiree received around $1,827 for January 2023. That works out to $21,924 per year, which is really not that much above the national poverty level for a single-person household. In a higher-cost-of-living area, that might not even cover rent.
As a result, even at its best, Social Security acts as a safety net program and a partial solution for the problem of retirement planning and funding. Don't just take my word for it: The Social Security administration itself says the following: "Social Security was never meant to be the only source of income for people when they retire."
Indeed, for the typical retiree, the program covers around 40% of that person's pre-retirement income. Again, Social Security itself acknowledges that's not enough, with this statement: "Most financial advisors say you will need about 70% of pre-retirement income to live comfortably in retirement."
Can you count on Social Security at all?
Between the shakiness of its financials and the relatively modest payout even when it does work, it's tough to base your retirement plan around getting a strong monthly check from Social Security. Still, despite those challenges, the program will likely be able to pay its beneficiaries something throughout their retirements.
It's with that mindset that not counting on Social Security can actually be a great way to improve your chances of a comfortable retirement. If you plan as though you'll get nothing from it, then anything you do manage to get from Social Security will feel like a bonus. Indeed, by not counting on it, it's much more likely to act as the safety net for you that it was originally designed as. That's a far better place to be than to be stuck worrying about a core part of your retirement running on extremely shaky grounds.
Of course, getting to the point where you could retire even if Social Security went away entirely is not an overnight task. If you start early enough, you can get there, but it takes time. The sooner you get started, the more of that precious time you'll have to make it a reality. So put yourself on a path to a sufficient nest egg today, and maximize your chances of getting that nest egg to a point where it can make a real difference for your golden years.
