The Social Security trust fund will become insolvent by 2033, slightly earlier than expected, the Treasury Department recently reported. A lot of people responded to the headlines that followed with confusion and worry about the future of retirement benefits.
Even before that news broke, many Americans had concerns: According to a survey by financial services company Nationwide, 71% of adult Americans worry that Social Security will run out in their lifetime.
The program will continue to be around to pay Americans benefits in retirement, though, experts say. "Don't take into account whether the government is going to run out of money because it can't run out of money," Carolyn McClanahan, M.D., CFP, and founder of Life Planning Partners says. And the Social Security retirement benefit "will be there for you."
Here's an overview of how Social Security works and how it's likely to keep working in the future.
Social Security benefits provide Americans fixed income replacement during retirement. Americans pay into it with each paycheck. In 2020, $1.1 billion dollars was paid into the Social Security program this way, and at the same time, $1.1 billion was paid out to over 64 million beneficiaries.
On pay stubs and earning statements, you'll notice deductions for Social Security and Medicare. Those are taken out by way of what are called FICA taxes, which come from the Federal Insurance Contributions Act.
In the event that the amount that needs to be paid out in benefits exceeds the amount of money that comes in via payroll taxes — for instance, because the workforce shrinks while the number of beneficiaries grows — the government can tap the trust fund to make up the difference. But it can only do that as long as there's money in the trust fund.
"Right now there's a little over $2 trillion in [Social Security's] trust fund," McClanahan explains, and that's gradually going to diminish. The trust fund is slated to run out of money in 12 years, according to an annual report published by the Social Security and Medicare Boards of Trustees.
That's because Americans are living longer and having fewer children, and at the same time, the American population is ageing. That means there will be fewer people paying into Social Security and more people taking money out of it.
The recent recession depleted the trust fund faster than expected, too. "People lost jobs, so the actual amount of money coming out of the payroll wages has gone down significantly," McClanahan explains. "Many Americans also stopped working because they couldn't work during Covid-19, and some decided to retire early. They started getting their benefits early."
McClanahan sees a lot of people try to claim Social Security early at 62 to make sure they get their money before it runs out. She warns that it will not happen. According to the Trustee report, even if the fund is depleted, Americans will still receive 78% of expected benefits.
Overall, "there's no reason for Social Security not to exist as long as this country exists," McClanahan says. "It will be there for you."
Put away what you can for the future by cutting back on unnecessary expenses now, for example. Consider working a few years longer, if that's practical for you. Think about relocating to a more affordable retirement destination down the line.
And make the most of your 401(k) plan at work now, if you have one, Charles H. Thomas III, a certified financial planner and founder of Intrepid Eagle Finance, previously told Grow. "Taking advantage of an employer's match is valuable, whether you are 25 or 75 [years old]," says Thomas. "Even if it's saving 1% in your 401(k), and building on that success over time."
Need help deciding how much to set aside? Grow's retirement savings calculator can help find a savings goal tailored to you.
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