Social Security has become such a highly charged topic that it is often referred to as a “third rail” that American politicians are afraid to go near for fear of voter retribution. The lack of open discussion has created many misconceptions about how Social Security benefits are funded, and the long-term viability and life expectancy of the system.
Misunderstanding Social Security can have a material impact on your future financial security. This is true whether you’re currently retired, nearing retirement age or working and investing for your retirement.
Below, we look at some of the more common myths and misunderstandings about Social Security and what we think you can expect from it in the future.
Some assume the government places the money workers contribute toward Social Security in something similar to a bank lockbox under each worker’s name, where it accumulates safely and securely until they start receiving it as benefits. In reality, Social Security is funded on a “pay as you go” basis: The benefits paid out are funded by the taxes paid in by people who are currently working.
Any contributions to Social Security that are greater than the amount needed to pay current Social Security benefits are placed in a trust. That money can only be used to buy special bonds that have been created by the federal government. Because this arrangement provides some protection from inflation, it can be beneficial for future Social Security recipients. The key point to remember is that your Social Security contributions are not a pool of funds the government has locked away until it is time for you to start receiving benefits.
Many people believe that they are guaranteed to receive the same amount in Social Security benefits that retirees are currently receiving. That might be a reasonable assumption—if the government was locking your contributions away into a personal account on your behalf. But as we’ve just explained above, that isn’t the case. The truth is that you have no guarantee of how much money you will receive in Social Security benefits.
Congress has changed benefit amounts in the past and could do so again. There are several scenarios in which benefits could be cut. For example, if there were a shortage of funds in the Social Security system at some point in the future, it would likely need to be addressed by a tax change, a benefit reduction, or some combination of the two. It is also conceivable that incredible technological innovation could make the Social Security program obsolete.
There is no way to accurately predict what may happen to Social Security benefits in the future. But as you’re planning for retirement, it’s wise to bear in mind that when it comes to Social Security, nothing is set in stone.
One of the most common fears people have is that the Social Security benefits they are counting on won’t be there when they are ready to retire.
The narrative usually goes something like this: Long-term projections show Social Security is running out of money. As large numbers of “baby boomers” retire and overwhelm the system, it will go bankrupt, leaving younger “baby boomers” and future generations without benefits.
While there’s no way to know what will happen in the future, Social Security is not faced with an immediate funding crisis, and we have good reason to believe it is unlikely to disappear entirely anytime soon.
First of all, politicians will have to introduce legislation to change or end Social Security. And if they agree on anything these days, it is that in order to remain in office, they must protect Social Security benefits. Politicians don’t even want to discuss Social Security, let alone attach their names to a bill or a vote that will cut benefits or phase out the program.
Having said that, if funding for Social Security were to become seriously threatened, Congress would be forced to make changes to ensure its survival. But at this time, it would be impossible to predict if that will happen, when it might happen, or what it would mean to you.
When it comes to the future of Social Security, it’s also important to keep the following in mind:
While it’s fine to factor Social Security benefits into your retirement planning, we caution against assuming current benefits will continue indefinitely, or that past trends will predict the future.
In addition to the issues noted above, consider that the amount you will receive will depend on the amount you contribute during your entire lifetime. This can make it challenging for people—especially younger investors—to accurately estimate how much they will receive.
A smarter course to consider is to create a plan for funding your retirement so that you’ll be secure, whether or not changes are made to the Social Security program.
We have deep experience creating custom retirement plans to match a wide range of needs and situations. Understanding the many factors involved in planning a successful financial plan for your retirement will help you define your goals and stick with your plan. Contact us and we’ll be happy to share more of our insights on Social Security and retirement planning with you.