Retirement Planning: Will Social Security Really Go Broke?
The way people talk when discussing retirement planning, it sounds like a foregone conclusion. However, despite what you hear, Social Security probably isn’t going anywhere. Click here to view my recent video about the viability of Social Security.
As a matter of fact, the Social Security Trust Fund is already at zero (even though some say it won’t reach that point for a few years): Our government has already borrowed trillions from it.
Believe it or not, you can still afford to retire—and claiming Social Security should be a part of it. You don’t even have to be one of those ultra-high net worth individuals. I break down some of the reasons why below.
Is Social Security Really Bankrupt?
Yes, you read that already-at-zero part (of the introduction) right.
Headlines and talking heads warning of Social Security going broke within a decade are common. Some days the message seems impossible to avoid.
However, don’t let this frighten you! It is really only half of the overall situation. If you’ll bear with me, I’ll explain what I mean–and how it could benefit you.
First, in order to better understand the full picture, let’s backtrack just a bit.
The essence of the story begins with the Social Security Act of 1935. The United States was enduring the infamous Great Depression. Deflation raged while unemployment soared to 25%.
In the Midwest, the Dust Bowl brought an almost biblical darkening of skies. Farms were ruined; buried overnight.
Meanwhile, banks failed in repeating waves while homelessness—and the number of insolvent senior citizens–rose.
In response to the worsening situation, President Franklin D. Roosevelt’s Committee on Economic Security drafted a response. Congress passed it.
President Roosevelt signed it into law on August 14th, 1935. The first benefits recipient was Ernest Ackerman of Cleveland, Ohio.
A motorman by trade, Ackerman had retired the day after the Social Security program had begun. He received a single lump-sum payment: seventeen cents.
All Social Security benefits are paid 50% from interest income earned by the Social Security Trust Fund and 50% from current employees’ payroll taxes. So, it’s not like he had been enrolled for years.
Despite what you may be hearing, retirees can expect a larger payment today than Ernest Ackerman received back then. However, let’s return to our flashback.
Although Ackerman was the first person to be paid benefits, Ida May Fuller was the first person to receive them monthly. As the first-ever claimant on the Certification List, she got check number 00-000-001 (for $22.54), which was dated January 31, 1940.
By the close of that year, the U.S. Social Security Administration paid out a total of $35 million in benefits. The total had risen to $961 million by 1950 and then $11.2 billion in 1960.
In 1970, the total was $31.9 billion. Disco faded—and the total Social Security benefits paid out rose until they reached $120.5 billion in 1980.
What Happened to the Social Security Trust Fund?
When 1990 ended, the United States government had paid out $247.8 billion to beneficiaries. By 2004, that number reached $492 billion, paid to 47.5 million people.
Five years later; in 2009, over 50 million U.S. citizens received $650 billion in benefits. As staggering as these numbers may sound, they weren’t actually problematic.
In fact, by the close of 2010, the Social Security Trust Fund had accumulated a surplus exceeding $2.6 trillion. By most accounts, that sum was actually expected to keep growing until 2022.
Nevertheless, a slow but steady decrease in Social Security funds is now predicted to start in 2023… until the Trust Fund is fully depleted around 2033.
Technically, this outcome is certainly possible.
However, I don’t believe it is likely. For one thing, this scenario assumes that political gridlock in our government will prevent an increase in Social Security taxes. While there’s no shortage of foolishness on either side, they will probably find a workaround.
For another thing, even if the Trust Fund were completely emptied, there would still be Social Security benefits rolling in from current U.S. employee payroll taxes. Absent interest from the Trust Fund, those payments might get smaller, but they should continue as usual.
The details of how the U.S. got into our current state of fiscal affairs would take multiple blog posts to explain. For now, what you need to understand is that if Social Security’s Trust Fund is a giant piggy bank, it currently has no cash inside it.
Instead, it is stuffed, tail to snout with paper notes reading “IOU” (I owe you). Every one of them is written in government pen ink and signed by Uncle Sam.
Does All This Mean That Social Security is No Longer an Option?
The good news is that while this is a mess, you can still plan a retirement (that doesn’t involve cardboard accommodations).
As I’ve mentioned, the payout from Social Security could be reduced, but it’s not likely to end soon. It should last as long as the U.S. government, itself does.
Chances are that before Social Security goes broke (and Washington has to admit that it’s diminishing), some kind of bipartisan agreement will be made in Congress.
Social Security payroll taxes will eventually get raised, but there are other potential remedies, too. For instance, three weeks of retirement age could be added every year.
Gradually, this could extend the full retirement age from 67 to 70. Combined with a higher ceiling of taxed wages, this should make Social Security more than solvent.
To sum up, we cannot predict how much of a benefits check you can expect in 2040 although I sincerely doubt there will be much political will to hurt benefits to seniors. Nevertheless, the U.S. should still be cutting them by that point.
So, you can use Social Security in your retirement planning. Don’t get surprised and don’t plan on failing, please! I discuss why you don’t have to in this video. Click here.
The situation is far from hopeless. Giving up is the worst of Social Security mistakes you can make. Contact me and start saving for retirement now.
I can help you prepare now, while there is still time before you reach full retirement age. Every year I conduct reviews of people’s retirement plans to make sure that they are headed for their best possible outcomes.
This is essential to making certain that you have a sound, consistent long-term investing strategy. If necessary, we can make adjustments to your plan together, as well.
It’s all about determining where you want to be, financially when you retire—and then investing in your best route to those goals.
Do You Need an Expert Second Opinion?
You probably have more potential for a comfortable retirement than you think. However, it would be easiest for me to show it to you if we met face-to-face, in person or over Zoom. We might even find some high-net-worth investing strategies together. I will review your earnings record, we assess your risk tolerance, and then we create a financial treatment plan together.
And by the way, if you’re thinking of changing investment advisors, why not get a second opinion in New Haven by contacting me?