Will there be any Social Security money left when you retire? (Part 2)

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 2

As of the end of 2017, OASI (the Old Age and Survivors Income, the official name of the retirement portion of Social Security) was providing benefits to about 45 million retired workers, dependents of retired workers, and 6 million survivors of deceased workers. These individuals received $952 billion in benefits. Current workers and employers paid in $911 billion in payroll deductions and another $85 billion came from interest on the trust funds – a total of $997 billion. So, the OASI income ($997 billion) was enough to pay all the bills ($952 billion), with $45 billion in surplus going into the trust fund.

But 2017 is expected to be the last year where that’s the case. In 2018, the Social Security Board of Governors forecasts outgoing retirement payments to exceed the income from payroll deductions and interest. The amount of that excess will come out of the trust fund. And continue to come out of the trust fund over the foreseeable future.

The current estimate is that the Social Security trust fund will be depleted in 2034. At that point, there will only be enough income to pay 77% of the promised benefits. If your retirement date is beyond 2034 (those born in 1968 or later will hit full retirement age after 2034), how can you count on social security?

The last major changes to the social security program were passed in 1983. Coverage was expanded to include more workers (which actually increased income); the way cost of living increases are calculated was lowered; the social security tax rates on self-employed individuals was increased; social security income became potentially taxable (depending on a tax-payers’ adjusted gross income); and increases in full retirement age from 65 to 67 were phased in. Most of these changes didn’t impact current retirees, and the increases in retirement age only affected those 45 or younger. So that’s the baseline we’ll use.

The legislation that was passed in 1983 came just in time: it was thought the program might not be able to pay full benefits beginning in 1984. This is significant – this Congress seems no different than their peers of the late 70’s and early 80’s. They’ll delay addressing the problem as long as they possibly can. I would not expect much change to Social Security until the 2030’s at the earliest.

Given that, can you count on social security income? I would address that question with three different answers. If you’ll achieve full retirement age (67) before 2030 (you were born in 1962 or earlier), it’s realistic to think no changes will happen before you retire. Historically, any changes made to the program have not hurt current retirees. You’ll likely be safe using the retirement income estimates you can download from the ssa.gov website.

The second age band would be those that will be younger than 45 in 2030 (born in 1985 or later). This cohort will take the brunt of any potential changes to the system. The likely amendments would be: raising the retirement age; lowering the cost-of-living increase rate; increase the payroll tax that is paid into the program; eliminate the payroll tax cap that is in place; or means-testing the program so that higher income earners get less in social security payments. For this group, I’d plan on getting no more than the 77% of projected benefits that the Board of Trustees estimates it will be able to pay out beginning in 2034. If your social security statement indicates you’ll get $2000 per month, I’d use $1540 (77% of the $2000) as a more realistic figure.

The third group comprises those born between 1963 and 1984 – individuals between the other two groups. You will likely face some changes to the benefits you collect, but not as drastic as the second group. My suggestion would be to start with your projected benefits (for example, the $2000 in the paragraph above), and adjust that number downward to anywhere from 77% to 99% of full benefits. The closer your birth year is to 1963, the less you should discount the monthly benefit estimate (i.e., the closer to the 99% number you should be). Say you were born in 1974, right in the middle of this group. A conservative adjustment would be the full discount to 77% ($1540 in our above example), but I would suggest a number right in the middle - $1760 (which is halfway between $1540 and $2000).

The worst case, the second age band, can use 77% of their estimated social security benefits in their retirement calculations. The best case (the first group) can continue to use their entire projected social security income when figuring out when they can retire. The most complicated is the third cohort. These individuals should adjust their anticipated social security benefits to a number somewhere between 77% and 99% of your estimated full benefits payment, depending on how close they are to 1963 or 1984.

In part three, we’ll use some examples, and show you how you can adjust your retirement plan to be as successful as possible, whether we encounter the worst case or not.