Social Security doesn't really live up to its name -- the "security" part, anyway. By design, the federal retirement program replaces only 40% of the average worker's paycheck. That's already a loose interpretation of security. Even worse, Social Security has a looming problem that could push that 40% income replacement even lower.
The shrinking trust fund
Social Security is funded by two sources: collected payroll taxes and a trust fund. The trust fund handles overages and deficits between the collected tax income and paid-out benefits from year to year. If the tax income is higher than program costs, the overage goes into the trust fund. If the tax income is lower than program costs, the trust fund covers the gap.
The issue is that the trust fund is projected to run dry in 2034. If no changes are made to Social Security's funding process, the tax income will then be the program's sole funding. Based on the latest outlook, that tax income will only cover 78% of benefits. Without any additional funding, benefits must shrink to match the program's income.
An uncertain benefit outlook
Lawmakers have 12 years to implement a solution that prevents a double-digit benefit cut. Will they do it? Your guess is as good as mine. It's probably fair to say that any solution will cost someone something. It might involve higher payroll taxes, lower benefits, a delayed full retirement age, or some combination of these.
I'm hopeful legislators can fix Social Security in a way that doesn't slash my benefit or yours -- but I'm not counting on it. Here's why:
- In matters of finance, I'd rather focus on what I can control. If I save enough for retirement and Social Security throws in a few pennies on top, great.
- It takes decades to amass enough funding for a comfortable retirement. If Social Security is overhauled in the next few years and my expected benefit changes significantly, I may not have time to course correct.
- Lawmakers get things wrong sometimes. A short-sighted fix now could cause bigger problems later. If I'm reliant on Social Security, an income cut in my 70s or 80s could be devastating.
- I see no downside to over-saving. Having too much wealth in retirement gives me options -- to enjoy my senior years or leave more money to my kids.
- Saving more now gives me flexibility to delay Social Security for a higher benefit. By today's rules, I can maximize my retirement benefit by waiting until age 70 to collect. If my savings already provide enough funding to retire, that wouldn't be a hard choice to make.
In short, not counting on Social Security should spare me from making tough choices to stay solvent later. I don't want to be forced into selling my home, moving out of state, or -- worse -- moving in with my kids in retirement. They deserve better than that, and so do I.
Building your own retirement
The average Social Security benefit is $1,555 monthly, or $18,660 annually. To fund that with savings, you'd need an extra $466,500 on hand. That assumes you'd withdraw 4% of your balance annually to remain solvent for 30-plus years.
If your retirement account is invested mostly in stock funds, you could amass $466,500 in 20 years with an extra contribution of $950 monthly. Admittedly, that's no small sum to round up out of nowhere from your budget.
Don't panic. What you can do is increase your current retirement contribution by $100 now. Then look for more opportunities to raise it later, like when you get a raise or find cheaper auto insurance. Remember that reducing dependence on Social Security is not an all-or-nothing proposition. Any additional funding you can set aside now will help you later.
Hopefully, Social Security will remain alive and well for as long as you and I do. But bolstering our nest eggs now can't hurt -- just in case things don't turn out that rosy.