Let Me Clarify
For most retirees, Social Security plays a major role in setting the foundation for income in retirement. While you should not rely solely on Social Security benefits to meet your needs in retirement, you should keep abreast of the health of the Social Security system to better evaluate different collection strategies and any impacts to your financial plan as a whole.
Recently, the Social Security Administration (SSA) published its 2021 Annual Report, detailing the current state of SS Trust Funds. Specifically, a focus of these reports is estimating when OASDI (Old-Age, Survivor, and Disability Insurance) trust funds would be exhausted through paying benefits above those that are funded by current payroll contributions. As of October 2021, the SSA estimates that current funds could run short by the year 2034.
This information might bring up some questions for people, including “Does this mean I won’t receive my full benefits?”; “What happens if these funds are exhausted?”; or “What about the money that I contribute from my paycheck?”.
Although I can’t predict exactly what the future will hold, let’s first take a step back to the Reagan administration. You may not know/remember, but in 1981 President Reagan was addressing similar, if not worse, concerns. In a May 21, 1981, Letter to Congressional Leaders on the Social Security System, President Reagan remarked:
“As you know, the Social Security System is teetering on the edge of bankruptcy. Over the next five years, the Social Security trust fund could encounter deficits of up to $111 billion, and in the decades ahead its unfunded obligations could run well into the trillions.”
Fast forward a few years, and these issues were “solved.” Through combined efforts of Congress and the Treasury, trust funds were replenished, and a variety of amendments were made to Social Security legislation. This is not meant to spark a political debate, nor should it be interpreted as not concerning. It just reminds us that it’s not the first time we’ve been backed into this corner. Congress certainly might find a solution, but we may want to prepare for any potential solution to likely occur much closer to the 2034 deadline.
To cover both sides of the issue, let’s not forget that all employees in the workforce pay into the Social Security and Medicare systems through FICA taxes. That 7.65% (6.2% for Social Security; and 1.45% for Medicare) withheld from payroll is used for funding benefits being paid to current recipients. As long as workers are paying into the system, even without the additional trust funds, retirees would still receive benefit payments, albeit at a lower rate. As of the most recent report, the Social Security Administration estimates that current payroll taxes alone would cover 78% of anticipated benefits.
A common theme in financial planning is to “hope for the best, but plan for the worst.” I’m sure you’ve probably even come across others on the internet, social media, or even in person, suggesting that Social Security won’t be there at all when you retire. While we can’t ignore potential funding issues, in my opinion, planning for that extreme likelihood isn’t necessary. However, I do think that events like this emphasize how literal the term “retirement savings” is today; that being how crucial it is to save for our own retirement.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual.