Retirement Planning

The Future of Social Security: Promises vs. Reality

Social Security has been in dire financial shape for much of its existence. The system has never been in sound fiscal shape almost from the beginning, and that was really by design. The first recipients of Social Security received far more benefits than they ever paid into the system. But that’s the nature of Social Security, which is merely a transfer-type social welfare program.

The first Social Security recipients received their Social Security payments from payroll taxes paid by workers. That generation that first started paying in received its benefits from the next generation of workers, etc. Each succeeding generation has relied on payroll taxes from current employees in order to fund Social Security benefits. Any excess funds were placed into Social Security’s trust fund, which funds were eventually moved to Treasury’s general fund and replaced with Treasury securities.

Social Security tax rates started at 1% for both employers and employees, with a planned rise to 3% each by the late 1940s. But benefits continued to outstrip revenue, so the tax rate kept getting raised by Congress, until it reached its current rate of 6.2%. Even with that, Social Security tax receipts no longer suffice to cover all Social Security benefits. Even combined with the interest on the trust fund’s assets there’s not enough money to pay all current benefits, so Social Security’s trust fund continues to be drawn down.

Current estimates are that Social Security’s trust fund will be drawn down by 2034, at which point Social Security taxes will only be able to cover 76% of expected benefits. But with the recent economic downturn, those estimates may even be somewhat generous. Social Security is in bad financial shape, and any retirees planning on relying on Social Security for a significant portion of their retirement income could do well to rethink their retirement plans.

What Is Congress Doing About Social Security?

So far Congress hasn’t seemed to notice that Social Security is in poor shape. With more pressing matters on its hands such as coronavirus, economic stimulus, etc., Social Security is the 800-pound gorilla that no one wants to touch. Any long-term fix to Social Security would likely require either an increase in taxes, a decrease in benefits, or some combination of the two. And that’s why Social Security is the third rail of American politics.

Neither political party wants to touch the topic of Social Security because an actual fix would mean extra hardship either for workers or retirees, or both. Any politicians voting for a fix that cut benefits would find themselves with angry senior voters looking to run them out of office. And any politicians voting for a solution that raised taxes would face similar ire. No one in Congress wants to lose an election over an issue that is still 15 years away. So what can be done?

How Does Biden Plan to Fix It?

We can take a look at the proposal by presumptive Democratic nominee Joe Biden to fix Social Security for an example of some of the ideas floating around out there. Biden’s focus is on the economic impact to retirees, and he decries the fact that Social Security doesn’t go far enough to support them.

One part of Biden’s plan is to provide greater benefits to older Americans. Those who have received Social Security for over 20 years would see a boost to their monthly checks. The downside to this, however, is that it would incentivize more retirees to take Social Security benefits as early as possible, potentially reducing their early payments as well as placing additional stress on the system.

Another part of Biden’s plan will be to provide a minimum benefit that is at least 125% of the poverty level. This would ensure that older Americans are provided a minimum standard of living from Social Security and would greatly increase the payments to lower income seniors. This of course adds an extra financial cost to the system, again increasing stress on the system. And it would likely incentivize even more retirees to rely solely on Social Security, rather than saving and investing to build up their own nest eggs.

Biden’s plan would also protect widowed spouses from benefit cuts. Currently, widowed spouses receive the higher of either their own Social Security check or half of their spouse’s check. Biden would change that so that a widowed spouse would receive 75% of the joint spousal Social Security benefit. That again would result in additional costs.

And how would Biden pay for all this? He apparently hopes to require high-income households to begin paying more Social Security taxes. Currently only the first $137,700 of an individual’s income is subject to Social Security taxation. Biden’s plan would extend the Social Security payroll tax to all wage earnings over $400,000. But those extra taxes would not confer any additional benefits. So in essence, high wage earners are going to be subject to new taxes that give them nothing in return. Overall, the plan is expected to result in losses to economic productivity due to the higher taxes.

It’s hard to see how politically palatable such an increase would be, especially given how politically connected these high rollers are. But then again, high earners could just see their income change from wage income to some sort of non-wage income or non-wage benefits in order to escape the tax.

What Should You Do?

The takeaway from all this is still that Social Security is in bad shape, and that you need to prepare yourself for the system’s shortcomings. That means building up your own retirement savings in any way you can.

Whether you invest in tax-advantaged retirement accounts such as a 401(k), TSP, or gold IRA, open brokerage accounts, or even just hide your money under the mattress, at the end of the day your efforts are the only thing you can rely on. Social Security doesn’t even have an explicit promise to pay retirees, just an implicit one, and the government is in danger of breaking that promise if the system doesn’t get fixed.

If you’re planning to rely on Social Security for even part of your retirement income, can you afford to lose at least a quarter of your benefits if the system isn’t fixed within the next 10-15 years? Shouldn’t you better start preparing now so that if the government doesn’t fix the system, you won’t be thousands of dollars short each year in retirement? Explore the options available to you to help boost your retirement savings so that if Social Security collapses, you won’t be left wondering how to fund your retirement.


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