Don’t Believe Everything You Hear about Social Security!

If you’re like many working Americans, you may be concerned about the state of Social Security and whether it will be there for you when you retire. Gail Buckner, CFP, our personal retirement and financial planning strategist, explores some myths about Social Security and eases some concerns about its future.

There are a lot of myths and misconceptions when it comes to Social Security. As I previously outlined, the state of Social Security is not really as dire as some may be led to believe. Here, I explore some myths, misconceptions and fears about this important retirement benefit.

Myth #1: It’s going broke by 2034

A lot of people are under the impression that Social Security is going to disappear within a matter of years. That means retirees and those living on disability insurance would get nothing. As in nada, zippo, the big fat zero. Grandma and Gramps will be out on the street.

How could this happen when Social Security’s two trust funds—one for paying retirement benefits and the other for paying disability—are sitting on a combined “reserve” of more than $2.85 trillion1 as of January 1 of this year?

Reality Check

The only thing that would force Social Security to stop paying ALL benefits would be total unemployment among the US population. As in, nearly everyone in the country loses their job, including air traffic controllers, all members of the military, Congress, your dry cleaner, supermarket checkers, Hollywood actors, coal miners, bank tellers, etc. That is, essentially everyone who works in the private sector and most who work for the federal government.2 If that were to happen, Social Security would no longer receive its portion of the “payroll tax” that is deducted from the paychecks of those individuals. As a result, it would not have the money it needs to pay benefits and would eventually deplete its reserves.

How likely is this? Not. At. All.

The latest report from Social Security’s Trustees1 explains that the combination of payroll taxes paid by current workers plus the surplus (“reserves”) that has been building up in the trust funds for decades will be enough to pay all benefits through 2033. That’s 16 years of solvency.

If Congress does nothing to shore up the program’s finances before then, Social Security will still be receiving payroll tax from current workers. That will be enough to cover 77% of the benefits it projects it will need to pay out. While that’s not ideal, it’s far from “broke.”

Myth #2: We’ll never be able to fix this. I’d better file for benefits as soon as I can.

If you’re worried about the long-term stability of Social Security, you are more likely to file for benefits as soon as you are eligible, even though it will result in a significantly smaller monthly benefit.

Reality Check

We’ve been here before. Shortly after Ronald Reagan was inaugurated as president in 1981, he was told that Social Security would be “technically insolvent” by 1983. That is, in two years it would not be collecting enough in payroll taxes to cover the benefits it would have to pay out. (This is the same situation we’re now facing, except that we have nearly 17 years to address this.)

Reagan appointed a presidential commission of experts from around the country. They were led by an obscure economist few had ever heard of: Alan Greenspan! In early 1983, the commission presented its recommendations. Congress approved them and President Reagan signed into law the Social Security Amendments of 1983. (I highly recommend reading them. But maybe not while you are on vacation.)

Among other things, Congress considered the advancements in life expectancy that had occurred during the nearly 50 years since Social Security was created and approved a gradual increase in the Full Retirement Age, the age at which you can receive 100% of the benefit you earned. Although approved in 1983, the Full Retirement Age did not begin to slowly increase from age 65 to age 66 until 2000, almost 20 years later. It will start increasing to age 67 in 2021.

Unfortunately, in the past 34 years Congress has only been able to pass legislation that addressed Social Security’s long-term financial imbalance on a temporary basis. The fact is, it wouldn’t take much to shore things up. (Please see my previous blog on this topic, “Despite Scary Headlines, No Big Changes to Social Security’s Outlook”).

While it seems impossible that progress could occur in today’s politically polarized climate, consider that in 1983 conservative Ronald Reagan was in the White House and democrats, led by Tipp O’Neal, controlled Congress. Yet, recognizing how important Social Security is to Americans, both sides managed to find common ground and pass the 1983 Amendments.