Social Security Won’t Go Away, But Don’t Count On It

Americans are confident that they can put themselves in a position for a successful retirement. They are only afraid that the government will not keep to the agreement.

About 72% of Americans expect to have a successful career by the time they quit, and 71% say they understand how much they can spend now versus how much they need to save for later, according to a 2022 survey by Northwestern Mutual.

But just over half – 56% – say they expect Social Security to be there when they need it.

They are not wrong to be skeptical. The Social Security Administration estimates that excess reserves in the trust fund from which distributions are paid will run out by 2034.

“There is a fear that running out means it will disappear, but it would be political suicide to take the advantage away,” said Beau Henderson, a retirement specialist at RichLife Advisors.

But even if it doesn’t go away in its entirety, Social Security could be reduced or subject to different rules by the time millennials and Gen Z investors retire, experts say.

With that in mind, here’s how financial professionals say you can safely include Social Security in your retirement plans, and why it’s worth keeping an eye on, even if you’re young.

Social Security is drying up, but probably not going away

If Americans fear Social Security is running out of money, it’s because, in a sense, the program is slowly running out of money.

Social security is financed through wage deductions. Currently, employees and employers each pay a 6.2% tax rate for the program, while the self-employed cover the total combined 12.4%.

But the money you put into it isn’t set aside just for you. Instead, it goes into a trust fund that pays out to current beneficiaries, such as retirees, survivors of deceased employees, disabled employees, and their families.

Currently, the amount collected through payroll taxes exceeds the benefits the program pays out. But that’s going to change as more members of the mass baby boom generation retire. If the excess reserves in the trust fund are exhausted by 2034, as expected, the SSA will have to start paying out 78% of pensioners’ full benefits.

Rather than completely scaling the program, “Congress is more likely to make changes and kick the canister down the road,” Henderson says.

Possible adjustments he envisions include raising the age at which benefits start, effectively allowing retirees to wait longer to claim benefits in order to maximize their payout. “Full retirement age is now 67 [for those born in 1967 or later]. For younger people it might be more like 70. Instead of early payouts at 62, it might be 64.”

Young people and social security: ‘It’s not your grandparents’ pension’

Social Security age thresholds are an important factor in retirement planning because the age at which you claim benefits affects the amount of benefits you receive.

Currently, an employee can retire at the age of 62, but that could lead to a benefit of 30%. Conversely, if you wait to take your benefits until after you reach full retirement age, your payout will increase by 8% per year until you hit your maximum at 70.

Those ages may seem a long way off to younger investors. But the changing rules Henderson talks about would materially affect your long-term plans, as most financial planners take Social Security benefits into account when calculating how much you need to invest to earn a given income in retirement.

If you expect a lower payment or have to wait longer to receive it, you may need to invest more now.

Investing as much as possible while you’re young really should be the goal, Henderson says. Gone are the days when most workers’ wallets were part of a “stool on three legs” backed by Social Security and a private pension.

“It’s not your grandparents’ retirement,” he says. “But you still have time to take advantage of time and composition.”

In other words, your portfolio will do a lot of the heavy lifting if you need income after retirement.

“The average household doesn’t really start to retire until it’s on the horizon,” Henderson says. But “if you start building assets early, that Social Security benefit is like icing on the cake.”

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