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Why You Should Worry Less About Social Security

A 1994 poll infamously claimed that more Gen Xers had faith in UFOs than in Social Security. It was basically bunk, but it had an aura of “truthiness” that still lingers with us today. How many times have you heard someone born sometime after the Hula Hoop say that Social Security won’t be around when they retire?

They are by no means alone. A 2011 Pew Research study found that 42% of Millennials and 35% of Gen Xers believed they will get no income from Social Security in retirement and other studies have estimated even higher percentages than that. (For more, see: How to Know When You Should Claim Social Security.)

The Good News

The good news is that they’re wrong, and here’s why.

“I’ve heard that Social Security is running out of money and I’m worried it will be empty before I retire and I will get nothing.”

That’s not how Social Security works. Social Security is a self-funded, “pay-as-you-go” system that gets its money from a dedicated payroll tax and taxes on some Social Security benefits. Taxes on current workers pay for the benefits of current retirees.

Do you expect your payroll taxes to go down in the near future by 6.2% (or 12.4% if you are self-employed)? I sure don’t and as long as that payroll tax continues to exist, some level of Social Security benefits probably will too.

“So what were they talking about?”

Social Security mostly wasn’t designed to save up for future benefit payments, although it does have a few trillion dollars in a trust fund saved up from the years when it took in more taxes than it spent. That trust fund is what you have heard is running out of money. It began spending that money recently and is projected to have spent it all by roughly 2033. (For more, see: The Top 5 Social Security Mistakes to Avoid.)

“My brother-in-law says that the trust fund doesn’t really exist and that the government took that money and spent it.”

The nearly $3 trillion in the trust fund(s) is invested in a special type of U.S. Treasury bonds. Although U.S. Treasury bonds are basically loans to other parts of our government, they are also widely considered to be one of the least risky investments on the planet. 

“So is our government prudently investing the trust fund or did they recklessly raid the trust fund and spend it on other things?”

Neither is totally false, but I lean strongly toward the trust fund is prudently invested. Otherwise, by using the similar logic, you could say that your savings account at your bank doesn’t really exist either (because your bank took your money and lent it out to other people who spent it). It’s not exactly untrue, but I think it’s misleading because it leaves out several really important factors out of the picture (the bank’s reserves, credit worthiness of the borrowers, FDIC insurance, etc.).

“So is Social Security basically gone when the trust fund is empty?”

You would think so from watching the news some days, but no, not even close. Assuming that Congress does absolutely nothing to improve the situation, Social Security is still projected to be able to pay each person 77% of their scheduled benefits in 2033. (For more, see: 4 Mistakes to Avoid with Your Retirement Plan.)

In fact, when my great niece (who was born the day I started working on this article) turns 74 in 2088, Social Security still looks to be on track to cover about 72% of each person’s scheduled benefits. 

“But that assumes that Congress does absolutely nothing. Won’t they do something about the ‘Social Security Crisis’?”

I know that it’s hard to imagine Congress not doing anything. But all sarcasm aside, as the third most popular service our government provides, Social Security’s popularity is only eclipsed by Medicare and fighting crime and it’s one slot above the national defense. In fact, only 10% of Americans support reducing the amount we spend on Social Security according to a 2013 Pew Research Center poll. I don’t know what Congress might or might not do but unless there’s a radical shift in public opinion, it’s difficult to imagine how eliminating benefits completely would wind up on the table. 

Whatever they may or may not do, there’s a strong incentive for politicians to proceed with care. The majority of Americans will collect monthly payments from Social Security if they live long enough, so most voters have a personal stake in seeing Social Security benefits remain in place and unreduced. The program was set up this way on purpose to make it more politically stable. This is one of several reasons why some people say proposing cuts to Social Security is political suicide.

“How bad is it? What would it take to ‘fix’ Social Security?”

To give you a very rough idea, we could raise the dedicated payroll tax by 1.45% (2.9% if self-employed) or cut benefits by 17% across the board immediately. In the real world, I expect that some combination of approaches would be tried. This Washington Post infographic and this AARP interactive tool both let you explore some of the possibilities in more detail. (For related reading, see: How Do I Calculate My Retirement Savings Percentage?)

“Okay, I think I understand what you are saying [author’s note: this is usually said with a dubious look] but I really don’t want to count on it when I’m planning for retirement. What’s the potential harm in letting it just be a pleasant surprise?”

Currently, the average retired worker gets about $1,300 per month in Social Security benefits based on the Social Security Administration’s 2014 fact sheet. Using a 30-year retirement and the 4% withdrawal rule as a rough estimate, you might need to save up an extra (and unnecessary) $390,000 to replace those benefits before retiring. How many hours of your limited and precious time on this earth would you have spent acquiring that money? What could you have done with those hours instead? 

Would scuttling Social Security continue to be “political suicide” in an America where nearly everyone falsely believed that the program was broken beyond repair? I sometimes suspect that we are the most meaningful risk to the future stability of Social Security, particularly those of us in Generations X and Y.

Millennials alone outnumber the Baby Boomers and that’s totally ignoring the approximately 60 million members of Gen X (don’t worry, we’re used to that). So if we live in a democracy where Millennials and Gen Xers outnumber everybody else and we overwhelmingly support Social Security, where does all this fatalism about its future come from? I mean, sure, life experience has taught us to be a really skeptical bunch but when did it become helpful for cynicism to trump logic?

Challenging the Falsehood

Now just to be clear, I absolutely encourage everyone to consider and prepare for the seemingly probable risks that Social Security benefits may be reduced or delayed and that payroll taxes may increase in the future. I think that’s fine and reasonable, but let’s all start challenging the falsehood that there are strong reasons to believe that Social Security won’t be there for future generations. (For more, see: 5 Things to Think About When It's Time to Retire.)