The Future of Social Security, Will it Still Exist?

Do you know what Social Security is? Do you know how it is calculated? Will it be around when you retire? Why you should log into your Social Security account. Today I’m going to discuss these topics and more.

What is Social Security?

In the United States Social Security is a government program that provides financial benefits to eligible individuals and their families. It is primarily designed to provide income support during retirement, but it also offers disability and survivor benefits. Here are some key points about Social Security:

1. Purpose: Social Security was established in the United States in 1935 as part of the New Deal legislation during the Great Depression. Its primary purpose is to provide a safety net for retired or disabled individuals and their dependents. Let me just add right here, that I don’t think anyone should rely on someone else, even if it is the government, to take care of them. This is a risky situation to put yourself in, so be careful if you plan on Social Security being your retirement plan.
2. Funding: Social Security is funded through payroll taxes known as FICA (Federal Insurance Contributions Act) taxes. Both employees and employers contribute a percentage of employees’ earnings to the program. Employers and employees each pay 6.2 percent of wages up to the taxable maximum of $160,200 (in 2023), while the self-employed pay 12.4 percent. The funds collected are then used to pay out benefits to eligible individuals.
3. Retirement Benefits: Social Security retirement benefits are available to individuals who have paid into the system for a certain number of years, typically through payroll deductions. The amount of benefit received is based on factors such as earnings history, age at retirement, and the number of years of work.
4. Disability Benefits: Social Security Disability Insurance (SSDI) provides income support to individuals who are unable to work due to a severe disability. Eligibility is determined based on the severity of the disability and the individual’s work history. The disability must be expected to last for at least one year or result in death.
5. Survivor Benefits: Social Security also offers benefits to the surviving spouse and dependent children of a deceased worker. Survivors may be eligible for monthly benefits to help replace a portion of the deceased worker’s income.

How is Social Security Payment Calculated for Retirement?

The calculation of Social Security retirement benefits is based on a formula that takes into account your earnings history and the age at which you choose to start receiving benefits. Here are the key factors involved in the calculation:

1. Earnings Record: The Social Security Administration (SSA) keeps a record of your earnings throughout your working years. Your annual earnings are adjusted for inflation to reflect current wage levels using the Average Wage Index. The SSA takes into account your highest-earning years, up to a certain limit (known as the taxable earnings base). Earnings above this limit are not considered in the calculation.
2. Primary Insurance Amount (PIA): The PIA is the base amount used to calculate your Social Security retirement benefit. It represents the monthly benefit you would receive if you claim benefits at your full retirement age (FRA). FRA is determined by the year of birth and has been gradually increasing. For example, for those born in 1960 or later, the full retirement age is 67.
3. Benefit Calculation: To calculate your benefit amount, the SSA applies a formula to your average indexed monthly earnings (AIME). The AIME is derived by taking the average of your highest-earning years (up to 35 years) after adjusting for inflation. The formula is progressive, meaning it replaces a higher percentage of earnings for lower-income individuals compared to higher-income individuals.
4. Bend Points: The benefit calculation includes bend points, which are thresholds used to determine the proportion of your AIME that is replaced by Social Security benefits. The bend points are adjusted annually. The formula consists of three parts that correspond to different ranges of your AIME. Each range has a different replacement rate.
5. Delayed Retirement Credits: If you choose to delay claiming Social Security retirement benefits beyond your full retirement age, you can earn delayed retirement credits. Delayed retirement credits increase your benefit amount by a certain percentage for each year you delay claiming, up to a maximum of 8% per year. These credits cease to accumulate once you reach age 70.
6. Cost-of-Living Adjustments: Social Security benefits are subject to annual cost-of-living adjustments (COLAs) to account for inflation and changes in the cost of living. These adjustments help maintain the purchasing power of your benefits over time.

Will it be around when you retire?

It is my personal belief that Social Security will continue to be around well into the future. I think it would be political suicide for politicians if they did not eventually fix Social Security, so I think the shortfalls will eventually be addressed. However, as we are all aware politicians like to wait to the very last moment to address issues so the challenges facing Social Security probably won’t be addressed until it is forced upon the politicians. Now that I’ve shared my personal thought on what I think is likely to happen, let me add additional details on this topic.

Social Security has been a significant program in the United States for many decades, providing retirement benefits to millions of Americans. While the program is facing financial challenges due to factors such as the aging population and a declining worker-to-beneficiary ratio, it is important to note that the Social Security system has demonstrated resilience and adaptability in the past.

The Social Security Trustees periodically evaluate the financial health of the program and project its ability to pay full benefits in the future. Their most recent report indicated that, based on current projections, Social Security can pay full benefits until 2033. After that, if no changes are made to the program, it is estimated that around 78% of scheduled benefits would be payable using the payroll taxes collected.

So when you hear people proclaiming Social Security is going bankrupt! Remember they are probably preying on people’s emotions or they don’t understand how this program works. Social Security can still pay out benefits even when the trust fund runs out, it just wouldn’t be able to pay 100% of benefits without changes being made by the government.

It is crucial to understand that the projected shortfall can be addressed through various means, such as adjusting the payroll tax rate, increasing the full retirement age, or modifying the benefit calculation formula. Historically, when faced with similar challenges, Congress has made adjustments to ensure the long-term sustainability of the program.

It is also worth noting that Social Security enjoys widespread support and is highly valued by the public. Any changes made to the program are likely to be carefully considered to ensure its preservation and effectiveness in providing retirement benefits for future generations. As I said above if politicians chose to do nothing it would most likely be political suicide for them.

Should I plan on Social Security?

While Social Security can provide a valuable source of income during retirement, it’s important to understand that relying solely on Social Security may not be sufficient for a comfortable retirement. I like to think of anything I am able to get from Social Security in the future as the cherry on top of my retirement. Here are a few reasons why you shouldn’t solely rely on Social Security and why saving on your own for retirement is essential:

1. Uncertain Future: The future of Social Security, like any government program, is subject to potential changes and uncertainties. While it is expected to continue providing benefits, there could be adjustments to the program such as changes in the eligibility age, benefit amounts, or payroll tax rates. Depending solely on Social Security leaves you vulnerable to potential future changes that may reduce the amount or availability of benefits.
2. Benefit Limitations: Social Security retirement benefits are designed to replace only a portion of your pre-retirement income. The replacement rate tends to be higher for lower-income earners and lower for higher-income earners. For many individuals, relying solely on Social Security may result in a significant income gap during retirement, making it difficult to maintain the same standard of living.
3. Longevity and Health Care Costs: Life expectancy has been increasing, which means individuals may need to support themselves for a longer retirement period. Social Security benefits alone may not be enough to cover living expenses, healthcare costs, and unforeseen expenses that may arise during retirement. Saving on your own can help supplement your income and provide a financial cushion for unexpected situations.
4. Lifestyle and Retirement Choices: Depending on your desired retirement lifestyle and goals, Social Security benefits alone may not be sufficient to support your plans. If you aspire to travel, pursue hobbies, or engage in other activities that require additional financial resources, having personal savings can help you maintain the lifestyle you desire.
5. Flexibility and Control: Saving on your own for retirement allows you to have more control over your financial future. You can make investment decisions based on your risk tolerance and financial goals. Additionally, personal savings provide you with greater flexibility in terms of when and how you access the funds, allowing you to tailor your retirement strategy to your specific needs.

By saving on your own for retirement, you can supplement your Social Security benefits and have a more secure financial foundation. Personal savings, such as contributions to retirement accounts like 401(k)s or IRAs, investments, and other assets, provide you with additional income sources and greater financial independence during retirement.

Why you should log into your Social Security account?

You should log into your Social Security account (https://www.ssa.gov/) at least once a year. This can offer several important benefits including:

1. Access to Personalized Information: By logging into your Social Security account, you gain access to personalized information regarding your estimated retirement benefits, disability benefits, and survivor benefits.
2. Verification of Earnings Record: Your Social Security earnings record is crucial for determining the amount of benefits you may be eligible to receive in the future. By regularly reviewing your earnings record through your online account, you can ensure that your reported earnings are accurate and up to date. Detecting and correcting any errors or missing information promptly can help avoid potential issues with your benefits down the line.
3. Estimation of Retirement Benefits: The Social Security account portal provides tools and calculators that allow you to estimate your retirement benefits based on different claiming scenarios. By inputting various retirement ages, you can assess how your benefit amounts may vary, helping you make informed decisions about the optimal time to start claiming your benefits.
4. Application for Benefits: If you are approaching retirement age or considering applying for Social Security benefits, logging into your account allows you to conveniently begin the application process online. By starting the application electronically, you can save time and avoid potential errors that may occur with paper forms.
5. Access to Important Documents: Your Social Security account provides access to important documents, such as your annual Social Security statements and benefit verification letters. These documents can be useful for various purposes, including tax filing, proof of income, and eligibility verification for other programs or benefits.
6. Enhanced Security and Fraud Prevention: Monitoring your Social Security account regularly adds an extra layer of security and helps detect any unauthorized access or suspicious activity. By being proactive and vigilant, you can protect your personal information and prevent potential identity theft or fraud.

In conclusion, Social Security plays a vital role in providing financial security and stability for millions of individuals and families. It serves as a social safety net, offering retirement, disability, and survivor benefits that help individuals maintain a basic standard of living and protect against unforeseen circumstances. Social Security provides a foundation for retirement planning, allowing individuals to supplement their personal savings and investments. Its long-standing presence and widespread support demonstrate its importance in society. It is still wise to plan for retirement with additional savings and not plan solely on Social Security. By understanding its benefits, staying informed, and actively managing your Social Security account, you can maximize your potential benefits and ensure a more secure financial future.

So what do you think, will Social Security be around for you?