No, Social Security Isn’t Going Bankrupt

Somewhere along the way, everyone started to believe that Social Security was doomed.

A 2021 survey by Nationwide found that roughly four in five Millennials and Gen Xers were concerned about Social Security running out of funding in their lifetimes. A majority of Boomers, many of whom were already receiving checks, said they were worried that they would stop getting monthly payments. Nearly half of Millennials indicated they believed they wouldn’t get a penny in Social Security benefits.

Fortunately, those concerns were misguided: Social Security is not going bankrupt. Millennials will get many plenty of checks when they retire. If history is any guide, Social Security will likely be the most important source of retirement income when today’s workers hang up their spurs.

“There is so much widespread misunderstanding that the trust fund being depleted is synonymous with bankruptcy,” said Catherine Collinson, chief executive of the Transamerica Center for Retirement Studies. “It’s not true.”

Here’s what you need to know about the confusion surrounding Social Security’s much-reported demise and how you can cut through that noise to position yourself for a comfortable retirement.

Why People Think Social Security Will Go Bankrupt

So why does this myth about Social Security persist? One reason may be the way the popular press covers Social Security news, using the program’s name as shorthand for its trusts.

To wit: The Social Security Board of Trustees put out a press release for its 2021 annual report on the long-term finances for the Social Security trust funds. The headline stated “Combined Trust Funds Projection Depletion One Year Sooner Than Last Year.”

Specifically, the report stated that the Old Age and Survivors Insurance (OASI) Trust Fund, which helps pay the benefits for current retirees (among other eligible Americans), was scheduled to be depleted in 2033, a year earlier than was believed the year prior.

Yet in a tweet on their write-up of the report, the New York Times began “Social Security will be depleted in 2033…”

Social Security will not be depleted in 2033—the OASI Trust Fund would be. And should that happen, retirees would still receive approximately 76% of their benefits.

That’s because your monthly check is paid for by the payroll taxes of current workers as well as from the trust. In other words, as long as there are Americans working and paying taxes, Social Security will continue to pay out benefits, even if they’re somewhat reduced from current levels.

Social Security Is Crucial to Your Retirement

It’s almost impossible to overstate just how key Social Security is to your long-term finances.

Here are just a few examples:

Given how integral the old age pension program is to all Americans, either those currently retired or future retirees, you’d think Millennials would be rioting in the streets, demanding a solution before the eldest of them starts claiming benefits in about two decades.

Instead, workers seem to believe that Social Security will just wither away. That they have no control over the situation. That they are resigned to a poorer future.

This type of attitude is detrimental to your long-term wealth.

To best position yourself to meet your financial needs, you need to believe you have control over your fate, that your actions matter, Texas Tech University assistant professor Sarah Asebedo told Forbes Advisor.

This so-called financial self-efficacy is a large part of financial literacy: Knowledge isn’t enough. You also must believe your actions will work to your benefit.

The problem with doom-and-glooming Social Security’s future is that it can create a negative feedback loop. If that essential program will ultimately recede, thus taking a big chunk of your wealth with it, what’s the point of saving more now when you’ll never have enough saved for later anyway? Why not just spend your savings on things that will bring you immediate joy?

A clear-eyed understanding of Social Security’s issues, then, can encourage you to save more now.

What About that Big Social Security COLA?

One the main benefits of Social Security is the cost-of-living adjustment (COLA) that retirees receive.

Each year, payments for Social Security beneficiaries are recalculated based on the rate of inflation that took place in the previous year. In October 2022, retirees got an 8.7% COLA, the biggest increase since 1981. That follows a 5.9% COLA in 2021.

This is a major coup for those living on fixed income, especially after the cost of staples, such as food and energy, have exploded in recent years. At the same time, it does put pressure on the system.

“Overall, it’s a win for retirees,” said Justin Halverson, a partner at Minneapolis-based Great Waters Financial. “It does pose a question about the solvency of Social Security, though.”

The 2022 Trustees Report found that the OASI Trust Fund would run dry in 2034, a year later than reported last year. Maya MacGuineas, president of the Committee for a Responsible Federal Budget, told the New York Times that she believed the most recent COLA would cause the depletion date to be spend up a year when next year’s report is released. Other experts predict it could happen even two years faster.

It’s probably too soon to tell since we don’t yet know how much revenue the program will receive through taxes on wages.

In any case, the trust fund often moves around by a year or two, depending on conditions on the ground. Whether the recent COLA causes the trust fund to deplete one or two years sooner doesn’t really change the nature of the problem.

Sometime soon, Congress will have to address the problem head on, or retirees will face an immediate benefit cut.

What You Can Do About the Pending Social Security Trust Fund Gap

Politicians will need to address the problem, either through benefit cuts or tax hikes. Evidence suggests Americans may prefer the latter.

In a 2019 Aegon Retirement Readiness Survey, respondents from various countries were asked how their government might make up a Social Security shortfall. The most popular answer from the U.S. was to increase funding (32%), followed by a balanced approach of some benefit reduction along with tax increases (21%). Simply cutting benefits polled at just 18%.

In any case, Congress has proven adept in recent years at coming together on bipartisan retirement legislation. A few years ago, it passed the Secure Act, which, among other things, eliminated the age limit to contribute to traditional individual retirement accounts (IRAs) as well as raised the age at which you must start taking required minimum distributions (RMDs).

Now, Congress is considering a sequel, the Secure Act 2.0, which would extend automatic enrollment in employer-based plans and improve the saver’s credit that rewards low-income Americans who contribute to retirement plans, among other measures.

Perhaps calm heads can similarly convene on shoring up Social Security’s long-term finances.

“This is a huge call to action and should be made a priority now,” said Collinson.

You, on the other hand, likely don’t have a vote in Congress. But there are still steps you can take now to help protect your Club Med days.

For instance, you may want to work with a financial advisor to run various contingency scenarios and stress test your potential retirement income in the event that Congress doesn’t act. Use the fear-mongering headlines to propel yourself to save an extra percentage point or two of your pay into a 401(k) or IRA. Or at least go to Social Security’s website and get a realistic estimate of what you’re entitled to.

No, Social Security isn’t going bankrupt. But you can still do more to better fund your golden years. That way, you’re prepared for a fulfilling retirement no matter what Social Security is paying out.

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