Members of younger generations, from Gen X to Gen Z, are worried about retirement, and with good reason! Right now, only 60% of workers are actively contributing to their workplace retirement savings account. While today’s rising economy has freed up the cash flow for many employees to start contributing more than they have in the past, that doesn’t mean everyone is on track to have enough saved by the time that they retire.
When I talk to people about their retirement savings strategy, the question of Social Security is almost always raised. Nobody is exactly sure how the program works, how much they can expect to receive when they retire, and whether or not they’re going to be able to count on it at all. The good news is that Social Security likely will play a role in everyone’s retirement income. How big of a role, on the other hand, is somewhat up in the air.
How Does Social Security Work?
Social Security was established in 1935 by the Social Security Act. Essentially, the program is designed to help America’s senior citizens and retirees stay financially stable after they leave their full-time jobs. When we’re employed, we pay into Social Security through the taxes that come out of our income each paycheck. A total of 12.4% of your income is contributed to the program – 6.2% is contributed by you (removed from your paychecks), and 6.2% is contributed by your employer, (so for my self-employed readers, you’re paying both sides of this).
Right now, the Social Security administration reports that $0.85 cents of each dollar that’s contributed to Social Security is directly contributed to a trust fund that pays out benefits to retirees and other Social Security program participants. That money adds up over time, and is used to calculate what your annual or monthly payout will be once you retire. Essentially, the longer you’re able to stay in the workforce to contribute toward Social Security, and the longer you delay taking Social Security during retirement, the higher your payout will be.
Many people plan on Social Security for at least a portion of their retirement income. Currently, the average Social Security payout is just over $1,400/month for people who enrolled in 2017. While that isn’t enough to cover all of your expenses during retirement, it’s still a notable amount to supplement any additional savings you’ve grown over the course of your career. However, many people are starting to wonder whether or not Social Security is sustainable, and very few people in younger generations are counting on the program to give them as large a payout as it currently provides to retirees.
Will Social Security Go Away Before You Retire?
Social Security’s cash flow has been negative since 2010. To continue to pay out benefits to Social Security recipients, the government has been using interest on its Treasuries – but that’s not a sustainable solution.
As of right now, the federal government has estimated there is enough saved to pay out benefits to all retirees through year 2035. With the baby boomer generation slowly moving toward retirement, the fear is that there will be too many people enrolled in Social Security, and not enough people contributing to the program to make it last.
This leaves only two options:
1. More money needs to be paid into Social Security.
2. Less money needs to be taken out of Social Security.
To accomplish one (or both) of these action items, the government can either raise taxes on current members of the workforce to pay more into the program, or it can reduce benefits for future Social Security enrollees. Neither of these options is a great solution for people with a long period of time before they retire. Although it’s impossible to say for sure, most economists believe that we’ll probably see a combination of increased Social Security taxes and lowered benefits.
Right now, there’s nothing that indicates that the government would do away with the program altogether. It’s been a relatively successful program, and helps to encourage Americans to stay in the work force and contribute to society for an extended period of time. That being said, you shouldn’t base your entire retirement strategy around a potential Social Security payout.
What Role Does Social Security Play in Your Financial Plan?
Social Security isn’t a fail-proof retirement income strategy. Especially if you’re age 40 or younger, it’s tough to say exactly how the total benefit calculation will be adjusted over time. Typically, when I talk to clients about retirement savings, I try to simplify things: focus on what you can control.
Your retirement savings, your investment portfolio, the time you spend in the market, and the amount of funds you contribute over the years are all in your control. When you choose to take Social Security is also in your control, and sometimes delaying your payout can help to increase the total benefits you receive month-to-month. However, the Social Security program itself is completely outside of your control. All you can do is continue to contribute and hope for the best. Instead of focusing your energy on worrying about your Social Security benefits, focus your energy on contributing to your retirement savings accounts and investing wisely.
If, for some reason, economists are wrong, and the way the Social Security program is operated is dramatically changed in coming years so that everyone continues to receive sizable benefits for decades to come – that’s great news for you! You’ve already done your due diligence to create a savings strategy and retirement income plan, and receiving Social Security benefits will only increase your cash flow and add to the funds you have available to live a fulfilling lifestyle as a retiree. Any benefit you receive from Social Security should be viewed as icing on the cake.
You probably don’t have to worry about whether or not Social Security will be around by the time you retire. My thoughts are that it will be around, but in a reduced form through smaller payments or an increased retirement age, but that’s not what you should be basing your financial strategy on to begin with. Create a savings plan that puts you on track to reach your retirement income goals and affords you the lifestyle you want should be your first priority. Any additional retirement income you receive from Social Security will be welcome if and when it comes.