What will Social Security look like when you retire? Many Americans have lost hope that there will be anything to see. According to a 2019 Gallup poll, 41% of individuals surveyed said they worry a great deal about the Social Security system. The same survey also revealed that 33% of individuals said they believe Social Security is going to be a major source of their income in retirement.

So what will Social Security realistically look like in the future? Should workers be concerned?

Key Takeaways

  • Social Security does not now—and is unlikely in the future to—provide enough income for a comfortable retirement.
  • If Social Security is reworked by Congress to extend its life, younger workers and high-income earners will likely be the ones to pay for it.
  • You should start saving for your retirement as early as possible by contributing to retirement accounts such as an IRA or 401(k).

The Future of Social Security

Social Security may look drastically different in the next few decades, especially since the Social Security Administration's 2019 Trustees Report estimates the funds will be depleted in 2035 based on the current way it operates. That means that it will have no cash reserves and will only be able to pay out what it takes in on an annual basis. The 2035 date is one year later than previous estimates, but some financial analysts predict the reserves could run out even sooner.

Social Security is a pay-as-you-go program. Earlier generations relied on decades of contributions from the huge baby boomer generation, which provided year after year of surpluses to the Social Security trust funds. Now, as the boomers retire, younger generations make up a smaller percentage of the workforce than in the past, creating a shortfall in funding.

Social Security depleting its cash reserves by 2035 means that, if you're in your forties or fifties today, you could conceivably not receive full benefits during retirement—even though you're paying into the system now.

Changes must be made. Many have speculated on what those changes will be. The most likely course of action is that benefits will be reduced and/or the full retirement age (at which a taxpayer's entitled to full benefits) will be raised. The latter is already happening. Depending on when you were born, 66 and 67 are already replacing 65 as the proverbial retirement age.

Who Will Be Affected the Most?

Younger workers and individuals who earn more may be hit the hardest. These two groups contribute the most to the fund and could end up reaping the fewest benefits. However, even if the funds were to be “depleted,” the Social Security Administration report noted, “At the time of depletion of these combined reserves, continuing income to the combined trust funds would be sufficient to pay 80% of scheduled benefits.” Later, it adds that “by 2093, continuing income equals about 75% of the program cost.”

That said, if you are planning to retire in the upcoming decade, it is important to use the time you have left wisely. Boost your retirement savings as much as possible while also paying down debt and keeping expenditures low. Social Security payments alone will not cover an average mortgage or living expenses when you are saddled with debt.

Social Security Is Not Enough for Retirement

Even if Social Security gets a huge makeover from Congress, workers should not consider the program as a sufficient retirement plan. Even now, Social Security barely covers living expenses for retired individuals.

According to the Social Security Administration, it estimates that it will pay 64 million Americans around $1 trillion in combined benefits for 2019. This might seem like a lot, but break down those numbers, and in 2019, retired individuals are earning $1,461 per month, on average, and disabled individuals are earning $1,234 per month. Individuals who exist on Social Security benefits alone don't live far above the poverty line, which is roughly $1,041 a month for a single person in 2019.

With the typical 401(k) plan, your pre-tax contribution is automatically deducted from your gross earnings in each paycheck, thus reducing your taxable income for the year.

The Anti-Social Security Retirement Plan

So what can an individual do when retirement is 20, 30, or even 40 years away? The best plan is to start saving now. Take advantage of the time you have and save as much as you can in your 401(k) and/or individual retirement accounts (IRAs), traditional or Roth.

Be sure to contribute enough to get your employer’s full match, even if it is a small percentage. Otherwise, you’re throwing away free money. If your company does not currently offer matching, you should still think hard about using the 401(k) plan, anyway. You get a tax break on the contribution, your contributions will grow tax-free, and you'll be able to deposit much more annually than you can in an IRA.

IRA Contribution Limits

The maximum amount that you can contribute each year to a traditional IRA and Roth IRA is $6,000 in 2020 and 2021. For those who are aged 50 and over, you can contribute an additional $1,000 in the form of a catch-up contribution. Conversely, the maximum amount that you can contribute to a 401(k) is $19,500 per year for both 2020 and 2021. If you are 50 or older, you can contribute an additional $6,500.

Roth IRA Income Limits

Contributions to Roth IRAs are limited and can be phased out, depending on how much income you earn and your tax filing status.

For the 2020 tax year, if you're single and earn more than $139,000, you can't contribute to a Roth. The income phase-out range for singles is $124,000 to $139,000, meaning the contributions get reduced within the phase-out range. For 2021 contributions, the income phase-out range for singles is slightly higher: $125,000 to $140,000.

For married couples who file jointly, the income phase-out range for 2020 is $196,000 to $206,000, and for 2021, it's $198,000 to $208,000. So, if a married couple earns more than $206,000 in 2020 or $208,000 in 2021, they can't contribute to a Roth.

Start Early

As early as your 20s, you should make every effort to start saving for retirement—even if you feel you cannot afford it or you’re not in your dream job. If possible, have retirement savings taken out automatically before you receive your paycheck. This way, you won’t miss the money. Another option is to learn to live off of 98% of your paycheck and invest the other 2%, then gradually increase the percentage each month while cutting back on spending.

The Bottom Line

Many people worry about whether Social Security will be available when they retire. Although it's unlikely that Congress will let the system go bankrupt, it's likely that belt-tightening changes will occur, including a longer waiting time until you qualify for full benefits and smaller benefits when you do. It is best for individuals to secure other retirement savings and not plan to rely on Social Security benefits as the chief source of their nest egg. That's not a good idea now and won't get any better in the future.