Will Social Security be around when I retire?
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Workers have been contributing to the Social Security system since the program began in 1937, and retirees have been collecting benefits since that same year. However, we are increasingly hearing questions from clients, especially younger clients, about whether or not they will receive their promised benefits.
The Background
Essentially, Social Security is a forced savings program designed to protect people from unexpected hardships. The exact provisions covered have evolved over time, but the core mission remains. The program collects mandatory taxes from workers and their employers throughout their careers and pays out benefits to retirees for the balance of their lives. Importantly, the taxes collected are not set aside for your later use. Instead, they are used to pay current retirees.
The Problem
Most of you have probably seen the math: if no changes are made, Social Security will “run out” of money around the year 2035. There are two main reasons for this: the aging of our population and its longevity. While Social Security’s full retirement age has increased from 65 to 67, this has not nearly kept up with the increase in longevity.
At the same time, the overall population has been aging. In 1945, nearly 42 workers were paying into the program for each Social Security beneficiary. By last year, that ratio had fallen to 2.7 workers per beneficiary. The ratio is expected to continue falling, eventually reaching a one-to-one ratio.
The Solution
Quite simply, the system needs higher taxes, lower benefits, or some combination of the two to remain solvent. Unfortunately, the issue keeps getting kicked down the road. Politicians see only the downside to any attempt at tackling this issue, so few try.
Getting Back to the Original Question: Will it be around when I retire?
Yes, Social Security will be around when you retire, no matter your current age. If nothing is done to fix the system, benefits will automatically be reduced by roughly 20% in or around 2035. As that deadline gets closer, we may see some legislative action, but I, for one, am not holding my breath. The farther you are from retirement, the less I recommend counting on current projections. Sooner or later, changes will come.
What Should Workers Do?
Whatever change comes to the Social Security program is way beyond the control of most of us. What we can do, however, is focus on that which we can control.
Take charge of your future by contributing to your own retirement savings: 401(k) plans, IRAs, and Roth IRAs. Supplement those with non-retirement savings in a brokerage account. Also, create a contingency plan with sufficient life insurance to allow a surviving spouse to adequately provide for the family. In short, rely on yourself.
Summary
Fears of Social Security totally going away are unfounded. However, changes are inevitable for a program on an unsustainable course. The big questions are when the changes will come through and how they will impact workers and retirees.
Lacking insight regarding these important outcomes, workers should focus on what they can control by saving aggressively for retirement. Given the uncertainty, relying heavily or solely on Social Security benefits to provide for your retirement lifestyle is not advisable. Plan accordingly!
David Crossman, CFA, is a Senior Portfolio Manager with Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website at www.bedelfinancial.com or email David at dcrossman@bedelfinancial.com.