Why You Shouldn’t Lose Faith in Social Security

Social Security Cards for identification and retirement USA.
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Increasing numbers of Americans are losing faith in Social Security. According to a 2021 survey from Nationwide, 71% of respondents indicated that they feel Social Security will run out during their lifetimes. For Generation X survey participants, that number jumped to a whopping 83%. Things look even bleaker to nearly half of the millennial respondents, as 47% believe “they will not get a dime of the Social Security benefits they have earned.”

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Responses from this study and others clearly show fear among Americans that Social Security is on the brink of vanishing. But the reality is that Social Security is a self-sustaining system, and it isn’t going anywhere. Here’s how Social Security really operates, along with a look at the news headlines that may be instilling these fears across America. 

What Is All This Talk of an Insolvent Social Security Trust Fund?

Oftentimes, irrational fears come from a kernel of truth, and worries about Social Security going away are no different. Every year, the Social Security Board of Trustees publishes a report on the status of the program, and recent updates have been alarming. According to the 2021 Social Security Trustees Report, the Old Age Survivors Insurance Trust Fund will become depleted in 2033.

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It’s easy to see how many people could read that statement and think that Social Security is going away in 2033, if not even sooner. But the way Social Security actually operates, that’s just not going to happen. 

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How Social Security Funding Actually Works

On the face of it, Social Security is an ingenious system. The program is funded by payroll taxes paid by workers and employers, with that money then used to pay benefits to current retirees. If you have ever wondered what the “FICA” deduction on your paycheck was, it stands for “Federal Insurance Contributions Act,” with 6.2% of your gross wages going to Social Security and another 1.45% going to Medicare. The 6.2% taken out for Social Security ends up in the hands of retirees, just like your Social Security payout will someday come from the paychecks of future workers. 

At the time Social Security was created, way back in 1935, the program had no problems, as there were far more workers paying into Social Security than there were drawing benefits. In fact, even as late as the end of 2020, there was a $2.9 trillion surplus in the program. But as the proportion of retirees to workers has grown, thanks in large part to increased life expectancy, program income (in the form of payroll taxes) hasn’t been able to keep up with program expenses (in the form of benefits paid). To make up for this shortfall, the Social Security Administration has been forced to draw down the Trust Fund surplus, to the point where it will be depleted by 2033.

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Why Social Security Isn’t Going Away

Even if the Social Security Trust Fund is completely depleted in 2033, Social Security isn’t going away. This is because it is primarily funded by payroll taxes on workers. The Social Security Trust Fund is simply a surplus collected from earlier years, not the primary funding source of the program. 

According to the same Social Security Trustees Report, if nothing is done to change the current program, benefits will continue to be paid in 2034, after the fund is depleted, but only at 78% of currently scheduled benefits. While this is far from ideal, receiving 78% of your expected benefits is a far cry from losing everything. 

Still, the U.S. government fully understands that any reduction in benefits is unpalatable to Social Security beneficiaries, so various proposals to shore up the program are already floating about Capitol Hill. 

Governmental Proposals To ‘Fix’ Social Security

Although “fixing” Social Security is something of a pressing issue, with the surplus expected to be depleted in 11 years or less, it may take some time for Congress to reach an agreement on how to proceed. Various proposals have come in and out of favor over the years, and while some may have more momentum now, there’s no telling exactly how the situation will be resolved. But here are some of the leading ideas when it comes to Social Security reform:

  • Increasing the Social Security wage base
  • Increasing the retirement age
  • Increasing the income thresholds above which Social Security benefits are taxed
  • Increasing the payroll tax rate
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Increasing the wage base, payroll tax rate and income thresholds for Social Security taxation would all raise additional revenue while increasing the retirement age would attack the issue from the other side by reducing total payouts. Which, if any, of these proposals will ultimately see the light of day is unknown at this time, but some type of change is likely.

The Bottom Line

Losing faith in Social Security is counterproductive because the program is not going away. Although changes will likely be made, and you should consider a potential benefit reduction in your retirement planning, as long as there are American workers, Social Security will continue to pay out the bulk of its scheduled benefits. 

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About the Author

After earning a B.A. in English with a Specialization in Business from UCLA, John Csiszar worked in the financial services industry as a registered representative for 18 years. Along the way, Csiszar earned both Certified Financial Planner and Registered Investment Adviser designations, in addition to being licensed as a life agent, while working for both a major Wall Street wirehouse and for his own investment advisory firm. During his time as an advisor, Csiszar managed over $100 million in client assets while providing individualized investment plans for hundreds of clients.
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