As it stands today, you can elect to receive social security benefits at ages 62, 67 and 70. Full retirement under the current Social Security system is considered to be age 67, a person can also receive early but reduced monthly Social Security benefits if he/she elects to receive benefits at age 62, and a person can increase his/her monthly Social Security benefits if he/she delays receiving benefits until age 70. I requested a copy of my Social Security Statement before I stopped working last year to view my estimated Social Security benefits. If I elect to start receiving benefits at age 62, my estimated monthly benefit would be approximately $2,100 and if I held on until age 70 to elect to receive Social Security benefits my estimated monthly benefit would be about $3,800.
That being said, over time I have been conditioned to believe that by the time I reach the age of traditional retirement I should not expect to receive any Social Security benefits. My previous employers and I have paid a combined total of just under $250,000 into the Social Security system so that would be a bummer. Polling seems to show that many Americans believe they will not receive any benefits either:
- A 2019 AP poll found that only 24% of Americans are confident that the Social Security system can pay out at least the same benefits in five years that it is paying out now.
- A 2019 Quinnipiac poll found that less than half of Americans thought that the Social Security system would be able to pay some type of benefit when they were eligible to receive it.
- A 2018 Pew Research poll found that 42% of Americans believed they would receive reduced Social Security benefits when they retired, and another 42% believed there would not be enough money in the Social Security system for them to receive any Social Security benefits when they retired.
- A 2015 Gallup poll from 2015 found that 51% of non-retired Americans thought they would not receive a Social Security benefit when they retired.
So, should we assume our ability to retire needs to be based on income that does not include Social Security benefits? Are those people now working and paying into the system unlikely to see any benefits?
I believe the answer to this question lies in the facts surrounding Social Security, Americans’ view on politicians cutting Social Security benefits in the future, and politicians’ willingness to take away something that a large majority of Americans value as part of their retirement.
The Three Competing Forces – the Facts, the People, and the Politicians
The Facts – Even without any changes to the system Social Security benefits are fully funded until 2035 and 75% funded until 2093.
The Social Security Board of Trustees releases an annual report to Congress on the status of the Social Security system. The 2019 Report shows that Social Security has an accumulated surplus of $2.9 trillion. According to the 2019 Report Social Security is 100% funded until 2035 and 75% funded for the next three-quarters of a century. This is without making any changes to the current Social Security system.
Now, it is not all rosy. Social Security benefits paid in 2020 are expected to exceed the Social Security taxes collected in 2020. This annual deficit will be the first time there has been a deficit for Social Security since 1982. The annual deficit will continue without changes to the system and the $2.9 trillion surplus for Social Security runs out in 2035. This means we will be running a deficit related to Social Security after 2035, which it not great, but it does not mean we will have no funds to make Social Security benefit payments. In fact, estimated Social Security taxes that pay for Social Security benefits are still projected to be sufficient to cover 75% of the scheduled Social Security benefits to be paid to Americans through 2093.
Right now, employers and employees pay a combined 12.4% of taxable payroll/earnings into the Social Security system. Employees pay 6.2% of their taxable income into the Social Security system on their first $132,000 of taxable income. To reduce the projected shortfall for Social Security through 2093, the annual payroll tax would have to increase by a little more than 3% (1.5% for the employee assuming the employer picks up half). This would eliminate the projected shortfall for another 75 years and it does not include other common sense changes such as removing the $132,000 cap on taxable income or pushing out the Social Security retirement age by a few years like the government did in the 1980s under the Reagan administration.
Ladies and gentlemen, the projected Social Security shortfall is very manageable and can be solved if we have reasonable people in Washington, D.C. working on it. A combination of some small tax increases, a push out of the retirement age by a few years, and the removal of the $132,900 cap will get it done. Even if the politicians inexcusably fail to address the shortfall, 75% of your current estimated benefits can still be paid through 2093 from the taxes to be collected under the current system.
The People – 74% of Americans say Social Security benefits should not be reduced in any way.
Social Security is a system most Americans value greatly and it is a central component to the retirement of most Americans. Nine out of every 10 Americans age 65 and older receive Social Security benefits. Recent research done by Gallup found that 57% of American retirees consider Social Security a “major” source of retirement income. It is even more important for middle and lower class Americans that have little else saved for retirement.
A recent Pew Research Center report found that “74% of Americans say Social Security benefits should not be reduced in any way” and only 6% of those surveyed favored cutting government spending on Social Security. Here are some additional polling results on Social Security that show how Americans view the program:
- 65 percent of adults aged 18 to 29 oppose cuts to Social Security;
- 77 percent of adults aged 30 to 49 oppose cuts to Social Security;
- 80 percent of adults over 50 oppose cuts to Social Security;
- 64 percent of adults with a Bachelor’s degree say Social Security benefits should not be cut for future retirees; and
- 79 percent of those with less education say Social Security benefits should not be cut future retirees.
Bottom line, Americans want Social Security to remain in place. Additional polling has shown that most Americans would prefer to raise Social Security taxes instead of cut Social Security benefits. Americans understand the growing issue with Social Security as it stands but they do not want their benefits taken away.
The Politicians – Democrats do not want to reduce Social Security benefits and Republicans will not commit political suicide.
The politicians in Washington D.C. seem willing to avoid dealing with Social Security right now, probably because the more urgent issue of not being able to pay 100% of estimated Social Security benefits does not hit for another 15 years. Supporting legislation that takes away Social Security benefits would be political suicide for an elected representative and pushing hard right now to increase taxes to solve a future shortfall that is still fifteen years away is not going to happen. The 2020 Presidential candidates are not talking much about Social Security but some of them have proposed solutions on their election websites.
Democrats: The trend is that most Democrat candidates would resolve the shortfall by increasing taxes on the rich or high-earners. They do not want to reduce benefits and in fact some of them want to increase benefits.
Republicans: Republicans in general do not have much to say about how to reform Social Security to address the future shortfall. In principal, Republicans prefer reducing entitlements like Social Security to achieve a smaller Federal budget but a recent poll showed that 68% of Americans identified as Republicans believe that Congress should not make any cuts to Social Security benefits. In fact, polls over the past decade have consistently found that a majority of Republicans believe that Social Security is more important than ever and they do not mind paying Social Security taxes. Therefore, unless public opinion has a strong change of heart Republicans will be hard pressed to charge forward with a plan that reduces Social Security benefits.
What this Means for Social Security and Your Retirement
The Likely Scenario
The most likely scenario is that Social Security will remain in place for generations to come and you will be eligible to receive a monthly Social Security benefit when you reach the eligible age. We will likely see some form of increase in payroll taxes to pay for any future shortfall. Congress may even try to begin to borrow to pay for this shortfall (it kicks the can farther down the road for them). An eventual compromise between Republicans and Democrats may increase Social Security taxes and push out the eligibility age by a few years. Either way, you would still receive Social Security benefits when the time comes.
The “High Earner” Risk
Some politicians may try to implement some kind of “Means Test” to reduce benefits for high earners. This is a possibility but even the most liberal of Democrats are tending to support requiring high earners to pay more in taxes to pay for Social Security without stripping those same high earners of their Social Security benefits. Most Americans consider it “fair” for a person to receive benefits if he/she paid into the system.
How to Factor in Social Security to Your Financial Independence/Retirement Planning
My financial advisor cut my Social Security benefits by 1/3 when he helped me analyze whether I could stop working last year. I separately modeled a scenario where I do not receive any Social Security benefits. However, I think the more likely scenario is that I receive full benefits sometime between 67 and 72. You should model all three scenarios but I really think it is unlikely your Social Security benefits vanish.