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Social Security provides the foundation of many Americans’ retirement plans. Unfortunately, that foundation isn’t as strong as you would hope for a program that so many people rely on. According to Social Security’s own trustees, even before COVID 19 hit, the program’s trust funds were projected to run out of money by 2035 — just 14 years from now.
While the program’s year-end 2020 status hasn’t yet been reported, the interim update published in November pointed to the pandemic even further weakening many of Social Security’s foundations. Objectively speaking, the future does not look good for Social Security, but not all hope is lost. With that in mind, here are four reasons you shouldn’t count on Social Security, and one reason why you should.
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No. 1: Even at its strongest, it doesn’t provide much
The average retiree gets $1,553.68 per month in Social Security benefits. While that’s enough to keep people slightly above the federal poverty level, it works out to about the same as a $9.32-per-hour job. That’s below minimum wage in more than 20 states.
As a result, if you think that Social Security alone will provide you with a comfortable retirement, you should seriously think again. At best, it offers a somewhat decent bulwark against abject poverty and provides a lifestyle somewhere in the neighborhood of a minimum wage job. Counting on Social Security for more than that sets yourself up to be sorely disappointed — at a time in your life where it’s very tough to earn and save enough to make up the difference.
No. 2: The clock is ticking to a massive benefit cut
Social Security’s latest trustee report indicates that the program’s trust funds will run out of cash in 2035. Table 1 in the November 2020 interim update provided data to suggest that the COVID 19 pandemic might have accelerated that date to 2034. Either way, you’re talking 13-14 years from now, well within the life expectancy of many current retirees — let alone prospective ones.
When the trust funds empty, Social Security will only be able to cover somewhere between 76% and 79% of its expected benefits, using money collected from dedicated taxes. Sure, even if that eventuality comes to pass, the program will still be able to provide something, but it’s still only a fraction of what already started out as a modest benefit in the first place.
No. 3: Past patches have only kicked the can down the road
When Social Security first launched, the tax rate was 2% on the first $3,000 of your income — half covered by the employer, and half covered by the employee. Now, the rate is a whopping 12.4% on the first $142,800 of your income. Even adjusting for inflation, that’s still a tax rate more than six times as high on a salary base nearly three times what it was when the program started.
Despite all the additional money put into shoring up the program over the decades, Social Security is still on track to see its benefits slashed by almost a quarter in the not too distant future. Even if you assume Congress will once again step forward to patch the program, you have to wonder how permanent that next patch will really be.
No. 4: Even if it does get patched, you’ll probably pay for it
History indicates that the key ways Social Security gets patched is through a combination of tax increases and benefit reductions. Roughly speaking, that translates to “you’re going to pay for any fixes to the program, either through higher taxes, lower benefits, or both.”
Since you’re going to have to pay for any fixes that come down the pike anyway, one of the smartest things you can do to protect yourself is to start investing to try to cover the gap. Think of it this way — if benefits get cut, then anything you’ve saved up to cover for the gap helps improve your lifestyle in retirement. On the flip side, if taxes go up, then it’s often a lot easier to cut back on your investments than to cut back on your lifestyle to cover those increased taxes.
Either way, you’ll probably pay for any patch that comes forward to help protect Social Security. Being prepared in advance by investing now will help soften the inevitable blow when it comes.
Still, not all hope is lost
Despite the very real and publicly well-known structural challenges Social Security faces, there is still one very good reason to believe the program will still be there for its beneficiaries. The reason is this — Social Security remains a very popular and strongly supported program. In fact, it’s commonly known as the “third rail of American politics” — as in touch it, and you die, just like if you were to touch the electrified third rail of an electrically powered train track.
That strong popularity means that it is very unlikely that Social Security will be allowed to outright fail. Whether by tax increase, benefit cut (or likely, some combination of both), Social Security will very likely once again get patched. Once that patch happens, people will once again be able to count on the program as a backstop to keep them out of abject poverty in retirement.
Recognize Social Security for what it is — and plan accordingly
If there’s one upside from the challenges that Social Security faces, it’s this: what the program can and cannot provide is abundantly clear to anyone who bothers to pay attention. When you’re in the process of retirement planning, you can use that information to better set yourself up for overall success.
When all is said and done, there is still good reason to believe that Social Security will still provide a foundation for most Americans’ retirement plans. Just remember that it was never intended and not designed to be more than just a foundation. Treat it accordingly and build a solid overall plan around it, and you’ll improve your chances of having a financially comfortable retirement.
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Chuck Saletta has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
