You're Probably Taking Social Security for Granted
Sean Williams, The Motley Fool
Updated
Social Security is arguably the most important retirement program in the country, but chances are that you, and many of the people you know, are taking it for granted.
Much of the focus in recent years has shifted to the troubles that lie ahead for the program that was paying benefits to almost 62 million people as of November 2017 (42.4 million of which are retired workers). According to the latest annual installment from the Social Security Board of Trustees, the Trust will begin paying out more in benefits than it's collecting in revenue by 2022. Just 12 years later, in 2034, the estimated $3 trillion in asset reserves held by the Trust will be completely exhausted.
Dice sitting next to a piece of paper that asks, Will Your Social Security Be Enough?
Image source: Getty Images.
Why the sudden flip of the switch for Social Security? It primarily has to do with the ongoing retirement of baby boomers from the workforce, which is pressuring the worker-to-beneficiary ratio, a somewhat steady lengthening of life expectancies for decades, and growing income inequality that's allowing the rich to live longer and draw higher monthly payments than lower-income folks.
You're dead wrong about Social Security not being there when you retire
The result is that quite a few working Americans have all but given up on the idea of Social Security being there for them when they retire. As an example, a 2014 Pew Research Center survey found that 51% of millennials believed Social Security would be insolvent and unable to provide them any income by the time they retire. Thankfully, half of the younger generation is wrong.
You see, Social Security is funded three ways. The smallest contributor is the taxation of Social Security benefits, which is applied to individuals with more than $25,000 in adjusted gross income (AGI), and couples with more than $32,000 in AGI. In 2016, the taxation of benefits generated $32.8 billion of the $957.5 billion collected by the program.
Second on the list is the interest earned by the Trust's excess cash (currently $2.87 billion). These asset reserves are primarily invested in special issue bonds, with a smaller amount in certificates of indebtedness. The interest income earned on this excess cash generated $88.4 billion in 2016.
Two Social Security cards lying atop a pay stub, highlighting payroll taxes paid.
Image source: Getty Images.
Lastly, but most importantly, we have the 12.4% payroll tax on earned income between $0.01 and $128,400, as of 2018. This tax on working wages was responsible for over 87% of the $957.5 billion collected in 2016. Essentially, as long as the American public keeps working, and Congress doesn't change the mechanism by which Social Security is funded, payroll taxes will ensure that some income is being parsed out to beneficiaries when they're eligible for a retirement benefit.
While it is true that the current payout schedule appears unsustainable beyond 2034, per the Trustees report, and a cut in benefits of up to 23% may be needed to sustain the program through 2091, it'll very much be there to provide some income when you retire.
Social Security does more than you realize
Many folks also think of Social Security purely in terms of retirement income. While just over two out of three recipients are retired workers, it does so much more. There's a really good chance that the program you may have chosen to give up on is covering you right now in the event of a long-term disability or the untimely death of a spouse or close family member.
A manufacturing worker standing in front of heavy-duty machinery with his arms crossed.
Image source: Getty Images.
As of November 2017, a little more than 10.4 million people were receiving a monthly payout averaging $1,039 as a result of Social Security's Disability Insurance program. According to the Social Security Administration, approximately 90% of workers between the ages of 21 and 64 are covered in the event of a long-term disability. While earning 40 lifetime work credits would qualify an individual in the event of a qualifying long-term disability, a staggered lifetime work credit scale is in place for those younger workers who've not had an opportunity to reach 40 lifetime work credits.
Similarly, 96% of workers between the ages of 20 and 49 have survivors insurance protection, whether they realize it or not. Should an eligible worker pass away, young children and/or the surviving spouse may be able to receive a survivor benefit based on the earnings history of the deceased spouse/parent.
Maybe you're leaning on Social Security too much
And then there are those at the opposite end of the spectrum who don't believe Social Security is insolvent, but are leaning far too heavily on a program that's simply not designed to be a primary source of income.
A senior man shrugging his shoulders.
Image source: Getty Images.
According to the Social Security Administration, retirement benefits are expected to replace about 40% of the average workers' wages. This figure could be a tad higher for lower-income workers, and a bit lower for the more well-to-do. But the primary point here is that it's not meant to be your primary or sole income source. Yet, the data shows that 62% of retired workers lean on the program for at least half of their monthly income, with 34% expecting it to provide 90% or more. This isn't a realistic (or smart) expectation given the potential for benefits cuts in 2034.
Whether you expect to rely almost entirely on Social Security in retirement, believe it won't be there at all, or you're unaware of what protections Social Security provides for you, you're probably taking the greatest social program in this country for granted.
