Will there be any Social Security money left when you retire? (Part 1)

I get questions all the time about the viability of Social Security. Pretty much any one under the age of 35 tends to assume that there won’t be any retirement benefits left by the time they’re ready to stop working.

Will social security be around when you retire? How much income can you count on? How do you create a retirement plan that would be successful either way? This series of articles attempts to answer those questions.

Part 1

How does the Social Security system – officially known as OASI (the Old Age and Survivors Insurance program) – actually operate? OASI (you may also see it called OASDI, which includes the separate Disability Insurance program) is a pay-as-you-go system, meaning income comes in from current workers’ payroll deductions and is used to fund benefits for current retirees. Essentially, the money that’s taken out of your paycheck each pay period is transferred to retired workers. If there’s more money coming in from workers than going out to retirees (as has been case for the last 35 years), there’s a surplus. If more money is paid out in monthly benefits than collected from workers, there’d be a deficit (which is the forecast for 2018 and future years). But in either case, some money is always coming in to pay benefits. The short answer is that the only way there would be no social security funds available to pay future retirees is if there were no workers. That’s the good news – unless dramatic legislation changes the whole structure – social security will be there when you retire. No matter when you retire.

During recent years, the income flowing into the social security system was more than sufficient to pay out all benefits, so the excess is used to buy special treasury bonds. These bonds actually contribute interest to total social security income, and are being held as an investment until such time as there isn’t sufficient income. They’re being used much as you’d use an emergency savings account. Then they’ll be cashed in when current contributions aren’t enough to cover benefits. This is the social security trust fund.

The Social Security Board of Trustees estimates that in 2018, income (payroll deductions and interest from the bond trust funds) will be insufficient to fully pay benefits. Then the liquidating of those bonds will begin. The best guess by the trustees that manage the program is that the trust fund’s bonds will be completely sold off by 2034 (the trust fund is that big to be able to fund the shortfall for 16 years). At that point, income will continue to be lower than the out-flow required to pay benefits. That’s the bad news – if you’ll be turning 67 (full retirement age for folks born after 1959) any time after 2034, unless changes are made, you won’t be getting full benefits. At that point, with no changes, OASI will be able to pay about 77% of promised benefits.

I can’t see a scenario where there won’t be some social security benefits available for anyone reading this article. The downside is it will be difficult to know what that exact amount will be. So, rest a little easier – social security will almost certainly be there for you. In the next article we’ll take a look at how to estimate your benefits and then how to work that estimate into your retirement plan.