5 Reasons Why You Can Count on Social Security -- And 5 Reasons You Shouldn't

Social Security serves as the cornerstone of most Americans' retirement plans. Indeed, it provides the majority of the retirement income that most retirees receive. Despite the program's importance and reputation as being a reliable source of income for retirees, Social Security does face significant challenges in the years ahead.

All that raises questions for current and potential beneficiaries -- in particular, should you count on the program at all, and if so, how much? Unfortunately, there are no easy answers or crystal balls, but there are certainly reasons to both believe in the program and ones to worry. To help you get a better handle on what those questions (and answers) will mean to you, here are five reasons why you can count on Social Security -- and five reasons why you shouldn't.

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So many people count on Social Security that it has been repeatedly called the "third rail" of American politics. That compares the program to the third line on some electrified subway systems -- the one that carries electricity to power the system. If you touch that rail on the subway, you risk dying from the electrical shock.

Similarly, politicians are so afraid of getting voted out of office that they're generally afraid to make changes to the system -- even ones designed to keep Social Security healthier for longer. That's not to say it'll never change. Indeed, with the funding challenges ahead for Social Security, something will change whether Congress wants it to or not. Still, it generally takes an imminently looming crisis Congress to be willing to do more than just tinker around the edges of it.

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The most notable Social Security reform bill that became law came out of the work from the 1983 Greenspan Commission. That reform both raised taxes and cut benefits to prolong the program's lifespan. Most notably, though, the commission was able to get its proposals enacted on by Congress in 1983 because the Social Security Trust Funds were on track to run out of cash that very year.

As painful as those reforms were, Congress recognized that without them, the cuts driven by the program's Trust Funds running out of cash would have been even more painful. With those Trust Funds currently expected to have money until 2035, we may need to wait another fifteen years or so for similar reforms to come, but history suggests they can take place.

Even if Congress does nothing to shore up the current Social Security system, its trustees believe that somewhere between 75% and 80% of its benefits will still be payable. This is because most of the benefits aren't paid from money in the Trust Funds themselves, but rather from the payroll taxes of people who are working. As long as Americans continue to work and pay into the Social Security system, the taxes they pay will still be available to cover a portion of benefits, even if the Trust Funds are empty.

Your Social Security benefit is based on your highest 35 years' worth of adjusted and covered earnings throughout your career. Since your benefit is customized based on your earnings and the taxes you've paid into the system, people believe they've earned their benefits based on their contribution to the program.

That sense of ownership adds to the public support for Social Security, which boasts some of the highest polling numbers among any government run program. Indeed, support is so high that people have routinely accepted tax increases to keep benefits flowing, both in terms of the tax rates paid and the income base on which those taxes are paid. That gives reason to believe that people may accept further tax increases to protect benefit levels in the future as the Trust Funds empty.

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One hundred percent of the Social Security Trust Funds is invested in U.S. Treasury debt, generally considered among the safest investments in the world. This is because the U.S. government has both the power to tax people to collect the money to make good on its obligations and because it has the power to print the U.S. dollars its debts are denominated in. That makes it unlikely that the government will default on its debt, although inflation could make the dollars it pays in the future worth less in terms of goods and services.

That conservative management of the Trust Funds gives Social Security and its Trustees a very clear picture of its financial state and future. That gives Congress plenty of time and pretty good visibility of what's to come for the program, providing a runway for a potential solution before the program's Trust Funds are depleted.

ALSO READ: Forget COVID-19: Social Security Was in Trouble Way Before the Pandemic

As confirmed by a case decided by the Supreme Court known as Flemming v. Nestor, Congress retains the right to change or deny benefits to even people currently receiving them. You have no contractual right to a benefit from Social Security, and only the benevolence of Congress and available funding make those benefits available to you.

In addition to the reforms in 1983 that cut net benefits (in part by making Social Security taxable if you have enough other income), Congress has found other ways to trim benefits. For instance, it restricted the "do over" that people used to have available that enabled them to pay back benefits they claimed early and re-file for a higher benefit level later. It also eliminated the "File and Suspend" strategy that allowed married couples to receive higher benefits by structuring how they claimed them.

When Social Security started, the tax rate was 2% (half paid by you, half by your employer) based on your first $3,000 of income. Currently, the tax rate sits at 12.4% (with the same half and half split) based on your first $137,700 of income. Even accounting for inflation, taxes rates are up more than six times as high on nearly triple the amount of income, and yet the Trust Funds are still on track to run out of cash.

Despite widespread public support for Social Security, there's a limit to the amount of additional taxes people are willing to pay to protect benefits. Especially if you take a step back and recognize how high taxes have increased over time for a program that is still running out of money, it's certainly fair to ask if there's a better way to cover Americans' retirements.

Social Security depends on a payroll tax -- a tax on income earned from working -- to cover the benefits it pays. With the COVID-19 pandemic shutting down massive swaths of the economy and throwing millions of people on the unemployment lines each week, that tax base is at serious risk, at least in the short term.

Although there's hope that the economy will reopen soon to enable people to get back to work, there's a very real risk that a great number of small businesses will be unable to reopen. That puts the former employees of those companies at a risk of longer term unemployment or at risk of only getting lower paying jobs when they are able to get new ones. The longer it takes to get people fully back to work, the larger the strain gets on the Social Security Trust Funds and the earlier they may run out of cash.

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The proposals on shoring up Social Security generally rely on some combination of raising taxes and cutting benefits. Either way, that means a high likelihood of less take home income for you, either as an employee or as a beneficiary (or both).

As a result, if you start planning for your retirement based on Social Security requiring you to pay more for what you'll get, you set yourself up for a more financially successful future. After all, if you're saving more in anticipation of those changes, then when the costs of fixing Social Security hit, you'll have a larger nest egg and the ability to reduce your investments to cover those costs. That's a better situation to be in than to be caught unaware and struggling to make ends meet when those costs come your way.

ALSO READ: Here's How Much Taxes Would Have to Rise to Shore Up Social Security

According to the Bureau of Labor Statistics, the average weekly earnings of a person working full time clocked in at $957 per week in the first quarter of this year. That works out to an annual salary of $49,764. 12.4% of that -- the amount taken in Social Security taxes -- is just over $6,170 per year. That's just a little bit more than an individual under age 50 is allowed to contribute to a Roth IRA to save for his or her own retirement.

If you could instead invest those taxes in the market throughout a 40 year career, it could be worth somewhere between $1.6 million and $2.7 million by the time you retire. Based on the 4% rule for retirement withdrawals, that generates somewhere between $5,300 and $9,100 per month in cash flow. Contrast that with Social Security's current maximum monthly benefit of $3,790 and average monthly benefit of $1,503, and you can see how much better that money could be put to use on your behalf.

If there's one thing that Social Security has done well, it's that the program has done a great job of keeping seniors who haven't otherwise prepared for their retirement out of abject poverty. With an average monthly benefit of $1,503, its typical recipient receives enough to stay just ahead of the national federal poverty level. Still, with just a little bit of planning on your own throughout your career, your retirement can be so much more comfortable than what you can get from Social Security alone,

Because of the way it's structured and the way most Americans think about the program, chances are strong that some form of Social Security will be there for you when you are ready to retire. If you treat it like a supplement to the plan you build for yourself rather than as the cornerstone of your retirement, you'll set yourself up for better success, no matter what the future may bring. That way, when it's patched (or even if it isn't), you'll have more flexibility in your own finances to see yourself through.

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