When you’re in the middle of your financial planning to fund your retirement, how much are you anticipating from Social Security? A little? A lot? Given the media propagates many stories about Social Security running out of funds in the not-too-distant future, it may be helpful to sort fact from fiction. While folks shouldn’t overstate the fears Social Security is about to dry up, it is prudent to not depend solely on it either during financial planning.
Sustainability fears about including Social Security in financial planning are based on the premise that payments draw from a static pool of money—colloquially known as a “lockbox.” However, this isn’t how it works. Social Security is a “pay-as-you-go” system—current workers’ tax payments fund current retirees’ benefits. That Social Security tax on your paystub isn’t going into an account in your name—it’s going straight to recipients instead. Eighty-five cents of every dollar paid funds current benefits (while the other 15 cents goes to federal disability insurance).
Another concern in many Americans’ financial planning: What if Social Security costs become unwieldy? After all, America is “graying” as Baby Boomers retire, and these shifting demographics suggest the system will need even more cash to support those payments. Where will that money come from? Millennials (i.e., Generation Y)! Not only are they entering their prime earning years, they also outnumber the Baby Boomers by 15 million. Besides domestic forces, external factors matter, too. Immigration brings a fresh supply of workers to pay into the system. And beyond adding more people, lawmakers can always tweak the current arrangement a bit, altering Social Security’s prospects significantly, which could affect the basis of your financial planning.
While they’re commonplace now, Social Security payments aren’t truly guaranteed, either. Social Security is an entitlement program, and folks must meet certain eligibility requirements to receive those benefits—an important consideration for your financial planning. Thing is, the terms of eligibility aren’t set in stone—they can change! This isn’t a revolutionary idea—Congress has made minor changes to Social Security for decades in order to ensure its solvency.
One prime example of how such changes can impact financial planning: In 1983, Congress raised the retirement age and made benefits taxable. Considering folks are living longer these days, is it possible the retirement age gets boosted higher? Sure! Cost-of-living adjustment changes could also stretch the program. Politicians don’t want to mess around with entitlement programs too much because of the political fallout, but unpopular ideas aren’t impossibilities—the status quo isn’t necessarily permanent.
While Social Security isn’t facing an immediate funding crisis and doesn’t seem likely to radically change any time soon, that doesn’t mean you should solely rely on it, either. If you’re 61 today and planning to draw from Social Security in 2017, chances are you can expect to receive benefits as they are structured now—big change isn’t likely for the foreseeable future, especially given political gridlock likely persists in the Beltway. On the other hand, if you’re 22 and just starting your career, retirement is probably the furthest thing from your mind—and a lot could change in the 40+ years you’ll likely be working; even though there isn’t a current reason or political willingness to eliminate this program, it can be risky to make it a major part of any financial planning. But if you’re younger and concerned Social Security won’t be around for you, your strategy is simple: Don’t depend on it! Instead, your financial planning should focus on building savings and investing in assets that offer long-term growth (e.g., stocks). Regardless of whether you’re calling it a career or about to kick it off, your financial plan should incorporate—rather than completely bank on—whatever you get from Social Security.
For long-term, growth-oriented investors of all ages, sound financial planning doesn’t depend on just one source of income, particularly one subject to potential political change. While Social Security can provide a nice supplementary stream of cash—and is no doubt deserved by those who have long paid into the system—we urge folks to build a thorough financial plan geared toward reaching long-term investment goals. That way, your golden years can stay golden, even if that Social Security net isn’t as wide as you initially thought.