Social Security has proven to be one of the best social programs the U.S. has ever launched. For many retirees, Social Security represents most or all of their retirement income. It's essentially their livelihood.
Unfortunately, Social Security's future has been questioned lately because of funding concerns. Social Security is funded by tax money, but as the baby boomer generation (people born between 1946 and 1964) exits the workforce, there haven't been as many tax-paying workers to replace them.
Social Security's worker-to-beneficiary ratio -- which shows the number of workers paying Social Security taxes compared to those getting benefits -- is projected to fall from 2.7 in 2023 to 2.4 in 2034. It may seem minimal, but that extra load on the system takes a toll.
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These concerns aren't lost on President Joe Biden, either, who attempted to deliver some relief to worried Americans. In a speech at the University of Tampa, he said the following:
I will not cut a single Social Security or Medicare benefit. In fact, I'm going to extend the Medicare trust fund for at least two decades. And we'll not raise taxes on anyone making over $400,000. And I'll pay for it all, my proposals, by making the wealthy and big corporations pay just a little bit more.
The gap in funding may not be sustainable as is
Social Security benefits are paid out through the Social Security trust funds, which are financial accounts in the U.S. Treasury. Since Social Security started in 1935, it's collected $26.40 trillion and paid out $23.57 trillion, leaving an excess of $2.83 trillion (as of May 2023).
The problem is that in 2022, Social Security collected $1.22 trillion and paid out $1.24 trillion. At the current collection and payout rates, the Social Security trust fund reserves will dry up by 2034. Needless to say, that's not music to the ears of the millions of people relying on it for survival.
Social Security benefits won't stop if the trust fund reserves become depleted, but tax revenue would only cover approximately three-fourths of benefits through 2097 (Social Security uses 75-year projection periods).
President Biden has voted for Social Security changes before
This scare for Social Security recipients is why President Biden has reinforced that he won't cut any Social Security or Medicare benefits. Unfortunately -- and this may come as a shock -- politicians don't always do what they say they'll do (or not do, in this case). It's not always bad intentions, but that's how politics goes.
It's worth noting that Biden has supported policies that resulted in reduced Social Security benefits, including voting for the Social Security Amendments of 1983. A huge part of those amendments was raising the full retirement age, which is the age someone's eligible to claim their full Social Security benefits.
While not ideal, raising the full retirement age is one way to address the current Social Security concerns. More people working longer means more Social Security tax revenue, and it delays some of the government's payout obligations. Again, not ideal, but better than some other alternatives.
Hope for the best, but prepare for the worst
Biden says he's committed to keeping Social Security, and to his credit, there's no real reason to believe otherwise right now. However, your plan should be to hope for the best and prepare for the worst. You can never be overprepared if changes happen, but you can absolutely be underprepared.
You can't directly control what happens with Social Security, but you can control your saving habits to make sure you have a backup plan in place. For most people, that's using available retirement accounts.
If you have a 401(k), consider increasing contributions and taking advantage of your employer match if they offer it. Consider opening an IRA account whether you have a 401(k) or not. The contribution limits for IRAs are low compared to a 401(k) -- $6,500, or $7,500 if you're 50 or older -- but they can be great for supplemental income.
Social Security will likely not go away completely, but cuts are a real possibility that retirees and approaching retirees need to consider when doing their financial planning. Approach retirement savings as if Social Security will be a minimal part, and then any "excess" will be a pleasant surprise.
