Social Security is one of the largest government programs in the world. But is it smart to just blindly trust the government and rely on them for our retirement funds? What if the bean counters up in Washington DC got things wrong and Social Security runs out of funds?

It’s true that Social Security funds are being depleted. In fact, the U.S. Department of Treasury’s latest report indicates that in its current form, Social Security will only be able to pay 100% of current promised benefits until 2033. Sounds frightening, right!?

So…what exactly is Social Security, and can we really count on it? Or is it a pyramid scheme that you’ve been paying into that’s going to crumble in the near future? In this article we’ll break it all down. 

What is Social Security?

It all started in 1935 as part of U.S. President Franklin D. Roosevelt’s New Deal in order to alleviate poverty among senior Americans during the Great Depression. The Social Security Act was never designed to provide a luxurious retirement. Rather, it was created to meet the fundamental food and shelter needs of older Americans.

Social Security benefits are simply payments provided to folks upon retirement or disability. These payments are intended to replace a percentage of income people lose when they retire or become unable to work because of a disability. Upon death, these benefits may be transferred to your spouse, children, and other qualifying family members.

To pay this very expensive benefit, the system is funded by all those who are still working. I bet you’ve noticed that “OASDI” line in your paystub under “deductions” and wondered why so much of your money was going to it. OASDI stands for Old-Age, Survivors, and Disability Insurance. It is a U.S. tax of your earned income that funds the Social Security program.

How Does Social Security Work?

As previously mentioned, during your working career you pay taxes into the Social Security system (OASDI) through an automatic payroll deduction. The more you earn, the more you pay. Then when you retire or become disabled, you, your spouse, and your dependent children receive monthly benefits that are based on the earnings you paid into the system.

However, individuals must be at least 62 years old and have contributed for a minimum of 10 years to qualify for Social Security retirement benefits. You don’t just get it automatically as a citizen. 

In 2023 the Social Security tax rate was 12.4%. However, if you are a W-2 employee, you and your employer would each split the tax, paying 6.2% respectively. The Social Security Administration (SSA) combines the funds from nearly 182 million Americans and uses them to pay existing beneficiaries’ benefits.

The benefits that retirees and other beneficiaries obtain are primarily funded by payroll tax payments from those who are actively working. Thus it is critical that the worker-to-beneficiary ratio remains high enough to provide full benefits.

Is Social Security Enough to Retire on?

The simple answer is no. When social security was created, it wasn’t intended to fund a person’s retirement completely. Especially not for multiple decades. In fact, the average American didn’t live long enough to reach retirement age when Social Security was first instituted. 

Examining 1930s life expectancy figures, we might conclude that the Social Security program was created in such a way that people would work for many years, paying taxes, but not live long enough to collect benefits. In 1930, men had a life expectancy of 58 years and women had a life expectancy of 62 years. All while the retirement age was 65. However, lifespans have dramatically lengthened over the past 100 years. Women now live to 79 and men to 73, on average. 

The three-legged stool – Back then, the prevailing thought was that retirement was akin to a three-legged stool. Private company pensions were the first leg of the stool. Basically, some employees were guaranteed a percentage of their paycheck if they stayed with the company for decades. Personal savings and investments were another leg of that stool. Social Security was the third. 

On average, Social Security retirement benefits only replace roughly 40% of a worker’s pre-retirement salary. The hard, but honest truth is that you will need other sources of income to live comfortably during your potentially lengthy retirement.

The average post-retirement Social Security payout in 2022 was $1,657 per month, which is just enough to keep a two-person household above the national poverty line.

Ask yourself, “Can I live off $19,884 a year from Social Security alone?”  Probably not. 

How do I get the max benefit? Can I live off that?

In order to receive Social Security’s maximum benefits there are a few thresholds you must meet. The main qualifier is that you have to earn the max taxable wage per year ($160,200 in 2023) for at least 35 years. Additionally, the longer you wait to claim your benefits, the more you will receive. The max Social Security benefits in 2022 were:

As you can see, even with today’s maximum benefit, it could still be difficult to survive on. Especially after making the max taxable wage for over 35 years… Your cost of living must be very high if you have little savings to show for those decades of work.

Future Concerns for Social Security

So…is Social Security going to run out of money? No, and don’t fall victim to the media hype of gloom and doom headlines. There will definitely be some form of Social Security when it comes time for you to claim it. Especially because Americans have come to appreciate and depend on this benefit.

And we mentioned that 2033 timeline where Social Security funds are likely to be depleted… But we’re not worried that 2033 will come along and that benefits will be dramatically cut or that money won’t be there to pay older Americans who have been paying into the system for decades. However, decisions may have to be made to revise the current format if benefits are likely to continue in the same manner.

Funding:

It’s important to remember that Social Security isn’t a government giveaway. The system is constantly being funded. This system has worked remarkably well for many years. And it’s highly unlikely that it’s going to radically change anytime soon. The fact that every working American is funding Social Security with each paycheck means that it’s NOT about to go “bankrupt” as you might have heard. It also means that there’s even less of a chance that this shortfall issue remains unresolved for too long. 

Future Changes:

So much depends on the willingness of politicians to actually work together in order to address this impending problem. I’m not sure if you’ve noticed, but theyr’e not great at that. The longer this problem lingers, the longer politicians kick the can down the road, the more drastic measures will ultimately become to shore up Social Security for future generations.

Changes to Social Security are inevitable in order to ensure that it remains solvent. There are a couple of likely changes we’ll see in the future once the political will is there.

Knowing that 60% of retirees solely rely on Social Security as their main source of income, something will eventually have to give. In 1983 there was a bill that attempted to ensure Social Security for future generations that gradually raised the retirement age from 65 to 67. We could see something similar happen in the future. We’re likely to see another attempt to raise the age at which you can receive your full Social Security benefits even further in the coming years.

We’re even more likely to encounter an increase in regular contributions from folks who are still working so that Social Security remains funded. FICA taxes are likely to increase slowly over a decade or two. You might see something like a .1% increase each year for a few years. Those slow increases will ensure that we all barely feel those increases. 

There’s also been talk of raising the income cap that currently exists for payroll taxes. Right now, if someone passes the $142,800 income threshold they cease to pay any FICA tax on the additional dollars earned. Increasing that cap would be another likely tweak. A combo of all these is likely to be the most palatable solution.

Rising Expenses:

Due to rising expenses in the current Social Security system, it seems like a couple of things are inevitable… Revenues will increase, or benefits will be cut, or a combination of both. No solution is ideal. No one wants to see their benefits reduced and/or be forced to pay more into the system.

But Social Security wasn’t built to be the sole safety net for multiple non-working decades. But it’s become that way as lifespans have lengthened. It’s simply not sustainable for us to continue to rely on it this way.

How to Prepare for the Future

So…what should you do regarding Social Security and your future retirement years?

First, don’t stress too much about all this because the future is mostly out of our control. However, there are a few things to consider:

1. Delay taking Social Security (bigger checks) – As you reach retirement age, the longer you wait to take social security the more money you’ll see in that monthly check. In fact, if you wait eight years and take that benefit at age 70 instead of at age 62 you’re likely to get a monthly check that is almost double in size! However, claiming Social Security at a later date isn’t best for everyone. There are important individual factors to consider, including how healthy you are. But for most folks, it’s best to wait longer in order to max out that check.
2. Keep working longer – If you’re going to follow the previous idea, you’re probably going to want to work longer too. Thanks to the digital age we live in, many jobs can now be performed into your later years. Planning to work in some form or fashion as you get closer to retirement age is going to help your finances, And it will provide a lot of other intangible benefits as well.
3. Invest independently – Consider increasing how much money you are socking away. Increasing your 401(k) contribution by a minimum of 1% every year is a good goal. Automating your savings will help ensure that you aren’t as reliant on Social Security in retirement. Contributing to a Roth IRA is another great way to establish a substantial nest egg. Personal savings have always been part of the three-legged retirement income stool. And the actions you take now are going to have an enormous impact on how comfortable you’ll be later in retirement.

The Bottom Line:

The SSA cites that 25% of Americans 65 or older rely on Social Security for 90% of their income in retirement. Don’t let this be you! Social Security should be a supplement to your retirement spending, not the main source of income.

The original intention of Social Security wasn’t to ensure that you continue living the life you had while working. It was more akin to an insurance policy, making sure that you weren’t destitute if you did end up living an abnormally long life. It’s important to understand what the Social Security system was designed for. It was never meant to allow us to retire in style for 3+ decades at the beach!

Despite what you hear on the news, Social Security isn’t going anywhere. While it may be true that in its current form the system’s trust fund will run out over the course of the next 12 years (if nothing is done), current projections show that there will be enough money to cover 75% of retiree benefits through the year 2090. That’s because with every paycheck millions of Americans are actively funding the system. So even if benefits are decreased, they’re not going to be eliminated altogether.

Social Security will be around for the long haul, although will eventually need to be revamped. But even if nothing is done and the politicians continue to sit on their hands, it’s not as dire as some of the alarmists make it sound. Even with a robust Social Security check, it’s still crucial to take your retirement future into your own hands by investing a portion of every paycheck now.