Social Security is often called the Third Rail of American Politics. It earned that nickname because it acts to politicians somewhat like the power-carrying third rail of an electrified train: touch it, and your political career dies.
With that kind of reputation, you might think that the program is in fairly good shape. On the surface, with about $2.833 trillion in its trust funds as of the end of August, 2023, it would certainly seem that way. Unfortunately, the surprising truth about the future of Social Security is that if Congress does nothing, those trust funds are expected to empty by 2034, cutting benefits by around 20%.
Image source: Getty Images
Social Security's reputation could very well be its undoing
Somewhat ironically, that reputation as a third rail may very well make it tougher to fix Social Security's long-term problems. The simple act of proposing fixes -- even potentially well-intentioned ones -- makes people a target for the opposing party.
For instance, proposals to enable investing some of the trust funds in assets with higher potential returns than government bonds are lambasted as giveaways to Wall Street. More traditional approaches of either a more controlled benefit reduction or higher taxes are met with cries of "throwing grandma off a cliff" or "choking off the economy from higher taxes," respectively.
That unfortunate reality means that even if you assume the best of intentions by those who wish to reform the program, very little is likely to get done until those trust funds are nearly depleted. There's precedent for that -- it wasn't until those funds were nearly empty around 1982 that Congress enacted the last round of major patches to the program.
Even then, the best they could get implemented were very clearly patches -- not permanent fixes -- to Social Security. The Greenspan commission that worked on those change were optimistically hoping their patches would keep the program solvent for 75 years. Had those patches lasted that long, they would have kept Social Security healthy into the 2050s.
What can you do about it?
If there's an upside to the challenges that Social Security faces, it's that they are clearly visible a bit more than a decade in advance of them becoming a reality. That gives you the gift of time to prepare. On that front, one of the most important things you can do is start investing to cover the gap that Social Security won't.
If the Greenspan commission's patches taught us anything, it's that the next round will likely also involve some combination of benefit cuts and tax hikes. By investing now, you set yourself up to be in a better spot on both those fronts.
- If benefits get cut, then the money you've invested can help cover the gap created by the cuts.
- If taxes go up, then you'll be able to cut back on investing new money, to cover the loss in take home pay from those tax increases
Either way, with about a decade left, you've got enough time to make a serious dent in covering for whatever path the next round of Social Security patches take.
Get started now
A decade is enough time to get a solid investing strategy in place and to leverage it to build a decent foundation for a nest egg. Yet the longer you wait to get started, the less time you'll have available before Social Security's next round of patches likely leave you with higher taxes, lower benefits, or some combination of both. So make today the day you start planning for that future, and improve your chances of being ready for whatever the future brings for that vitally important program.
