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Social (in)Security:  A Storm in your Forecast

Social (in)Security: A Storm in your Forecast

October 17, 2018
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Can I rely on Social Security in retirement?  Will I even have a benefit?  Questions I get all the time, and for good reason.  There looks to be a storm on the horizon.  Let’s talk about the security, or lack thereof, of Social Security.

To keep it simple, the idea behind Social Security is that working age citizens earn incomes and pay into the Social Security system through their payroll taxes (FICA), or (SECA) if you’re self-employed like yours truly.  Those funds go into a huge trust which distributes monthly amounts to elderly, widowed or disabled American’s to help keep them from falling into poverty just because they can no longer work or lost the breadwinner of the family. 

To a certain extent, it has worked!  Social Security income is estimated to have reduced the poverty rate for Americans aged 65 and over from 40% down to 10%.  Without Social Security, the most recent Census data tells us that about 22 million more Americans would be living in poverty.  In Indiana alone, the number of elderly kept out of poverty by Social Security is as many as 319,000! 

However, recent studies done by the Social Security Administration itself show us that the program’s financial outlook isn’t so secure.  What might that mean for our future?

Let’s first take a look at how we got to where we are…

Since 1935, the Social Security Administration has received about $21 trillion (with a T) dollars and distributed about $18 trillion, leaving a current reserve of about $3 trillion.  Sounds like a lot, right?!  Not so fast…

Historically, we’ve had close to 3 working Americans for every citizen drawing social security.  At that ratio, the system stays afloat.  However, as baby boomers enter retirement, the ratio begins to change.  By 2035, it is estimated that there will be closer to 2 workers for every claimant.  At that ratio, the system begins to sink. 

Here’s another factor: WE ARE LIVING MUCH, MUCH LONGER.  The average life expectancy today is 79, vs. 61 in 1935 when the program was enacted into Law. Our retirees today are receiving benefits for many more years than they were when the program was designed.

Less workers paying in per claimant + the average claimant receiving benefits for much longer = trouble. In fact, the Social Security Administration projects that benefits paid will exceed taxes taken in starting right here in 2018 and continue this way as far as the eye can see.  What does this mean for us? 

It means at some point, the $3 trillion surplus will be eaten up by this annual deficit and the program will no longer be able to pay a full benefit.  It’s currently estimated that this is going to happen in 2034, just 16 years from now.  From 2034 on, the Social Security Administration expects to be able to pay about 75% of the current benefit levels until the end of the 21st century. 

So, if you were receiving $2,000 a month from Social Security, you would expect your monthly income to drop to about $1,500.  That’s a big deal if you’re retired and living on a fixed income.  It may force retirees to find part time work to make up the difference, something they may not have expected to ever have to do the day they retired. 

Luckily, it’s a risk we can see coming, which means we’ve got time to prepare for it. 

What can we do?

We can mitigate the impact of the social security reduction if we reduce the level to which we planned to rely on it.  Focus more on saving for your own future through your employers retirement vehicle or individual retirement accounts so you can generate your own income streams in retirement.  Put a plan in place to pay down your debts prior to retirement so, for example, you don’t enter those years with a big mortgage on the books.  When you meet with your financial planner, ask them to show you the impact of a 25% social security reduction. 

It all comes back to planning.  While future retirees may not have the same benefits available to as those who came before, we do have time to prepare.  Use the time wisely to get a plan in place in case these forecasts come to fruition and your Social Security benefit ends up being 25% less than expected.    

 

 

All statistical information obtained from ssa.gov and forbes.com

This is meant for educational purposes only.  It should not be considered investment advice, nor does it constitute a recommendation to take a particular course of action. Please consult with a financial professional regarding your personal situation prior to making any financial related decisions.  Investing involves risk, including the potential for loss of principal.  10/18