Should I Rely on Social Security for Retirement?

As a Certified Financial Planner who has conducted over 5,000 financial planning meetings during the past decade, the topic of Social Security and if it will "be there" for my clients' retirement has come up numerous times. This is certainly a valid concern and is becoming more relevant every year as the population of our country continues to age. (For related reading, see: How Secure is Social Security?)

In order to have a better understanding of what Social Security is, I first want to tell you where and how it originated. 

Where and How Social Security Began

It all started in 1889 with Otto Von Bismark’s "old-age social insurance program" in Prussia. You may be thinking, how the heck did a program from 19th Century Prussia turn into our Social Security system?

Well, how did Otto’s system work? According to the Social Security Administration, Otto’s system “provided contributory retirement benefits and disability benefits as well. Participation was mandatory and contributions were taken from the employee, the employer and the government. Coupled with the workers' compensation program established in 1884 and the 'sickness' insurance enacted the year before, this gave the Germans a comprehensive system of income security based on social insurance principles. (They would add unemployment insurance in 1927, making their system complete.)”

Essentially this original system was a way to protect and support not only the working people, but the entire economy so people could retire with a sense of economic security that was supported by basically everyone. 

This system was used as one of the main building blocks for the Social Security system we use today. Our system, in its current form, came into existence on August 14, 1935, being signed into law by President Roosevelt. To list the full act and all the changes over the years is simply way too much for this blog post. You can visit the Social Security Administration’s website for a full history. Thus, the system we have today was put in place as an economic security measure to not only force us to save, but also to provide a source of guaranteed income in the future. (For related reading, see: 10 Common Questions About Social Security.)

How Does Social Security Affect My Retirement Plan?

Due to a variety of economic, demographic and political changes, the Social Security and Medicare trust funds are now in a perilous state, affecting the very retirement people have been working toward for decades. Any American who is paying Social Security and Medicare taxes receives an annual statement of benefits, which is supposed to help you plan for the future by telling you what benefits you can expect when you retire. If you can’t find this statement you can use the Social Security Retirement Estimator to get a pretty good idea of your projected benefits.

The Problem With Relying on Social Security and Medicare

According to the 2016 Annual Report by the Social Security and Medicare Boards of Trustees, “The Trustees project that the combined trust funds will be depleted in 2034,” and that “The Trustees project that the Medicare Hospital Insurance (HI) Trust Fund will be depleted in 2028.”

In other words, for every dollar you pay into these trust funds, when you go to retire you will get back about only 75 cents! Now that should be alarming and a wakeup call to us all. The trustees conclude by saying, “Lawmakers have many policy options that would reduce or eliminate the long-term financing shortfalls in Social Security and Medicare. Lawmakers should address these financial challenges as soon as possible. Taking action sooner rather than later will permit consideration of a broader range of solutions and provide more time to phase in changes so that the public has adequate time to prepare.” I completely agree that things need to change, but will our political system figure it out in time, or at all for that matter? (For related reading, see: Will the Social Security Cap Increase Help It Last Longer?)

How Do I Plan for My Own Retirement?

Well, it depends on your age. If you are currently drawing Social Security income, or plan on starting in the next five years, then chances are pretty good you have nothing to worry about, at least as far as SSA income is concerned. If you are like the many millions who are one, two, three or more decades away from being eligible to collect Social Security benefits, then you need to start planning now.

Although each person’s financial situation is different, I tend to recommend that my younger clients, me being one of them, not plan on receiving anything from Social Security or Medicare. This is planning for the worst and hoping for the best. If we plan this way, then chances are we should be OK in retirement regardless of what government benefits we may or may not receive.

I would encourage you to think about what your hopes, dreams and goals are and take a hard look at your current financial situation. Then consider meeting with an advisor to help you evaluate and analyze where you are for the basis for planning for the future. Regardless of your age, planning for the future is, in my opinion, a key to realizing your hopes, dreams and goals while also planning for the unexpected, or in the case of Social Security, the writing on the wall. (For more from this author, see: 3 Habits Happy People Use in Financial Planning.)