Will Social Security be Around When I Retire?

Workers have been paying into the Social Security system since the program began in 1937. Likewise, retirees have been collecting benefits since that same year.  Is the money running out?

More and more, we are hearing questions from clients, especially younger clients, about whether or not they will receive their promised benefits. Since Social Security is considered a critical part of most people’s retirement planning, it is a very important question.

The Background

President Roosevelt said the following upon signing the Social Security Act: 

"We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age."

Essentially, Social Security is a forced savings program that is 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 then pays out benefits to retirees for the balance of their lives.

The Problem

Most of you have probably seen the math: if no changes are made, Social Security will run out of money somewhere around the year 2035. There are two main reasons for this – the aging of our population and its longevity. With regard to longevity, the life expectancy for those who reach age 65 has increased 40% for women and 50% for men since 1940. This means that the Social Security Administration is sending out payments for a lot longer these days. Full retirement age has increased from 65 to 67, but this has not kept up with the increase in longevity.

At the same time, the overall population has been aging. In 1945, for each Social Security beneficiary there were nearly 42 workers paying into the program. As of 2012, the ratio had fallen to 2.9 workers per beneficiary. The ratio is expected to continue falling, eventually reaching a one-to-one ratio.

The Solution

Much like dieting, the solutions are simple in concept but difficult in practice. The system needs higher taxes, lower benefits, or some combination of the two in order to remain solvent. Pretty straightforward, right? Well, yes and no. Any modifications will lead to winners and losers. It is virtually impossible to enact changes which will impact everyone equally. Further complicating the picture, each political party has drawn its own effective line in the sand thereby making any change even more difficult to enact. Republicans generally are opposed to higher taxes, while Democrats do not want to see any lowering of benefits. Several bipartisan proposals have been rattling around, but none have come remotely close to passage. Unfortunately, the issue keeps getting kicked down the road.

Getting Back to the Original Question: Will it be around when I retire?

We feel comfortable saying that yes, Social Security will be around when you retire, no matter what your current age. However, the younger you are, the more different it is likely to look when you ultimately start taking benefits. This could mean lower payments, later payments (a higher age requirement before taking benefits), or both. The farther you are from retirement, the less we would recommend counting on current projections. Sooner or later, changes will come.

What Should Workers Do?

To a large extent, 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, be sure to 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