Can You Count on Social Security?

“New Social Security Retirees Will Outlive Official Trust Fund”. That was the headline in the January 15, 2013 edition of the Investor’s Business Daily.

At first I thought they meant that people entering the work force wouldn’t receive their full benefit at retirement. Looking more closely I realized they were talking about people that are retiring right now, not at some distant date in the future. According to the article, people turning age 62 today may face a 25% cut in benefits as soon as the year 2033. In 2033 the Social Security Trust Fund is forecast to be depleted. Benefits will continue to be paid to retirees out of the contributions of those still in the workforce at that time, but those contributions will only be enough to cover about 75% of the promised benefits.

worker-per-beneficiary-chart

There are a lot of factors contributing to today’s state of affairs, but to at least some degree, social security benefits are being strained by changes in demographics. According to the Mercatus Center at George Mason University, the ratio of workers supporting retirees has declined dramatically.  Some experts estimate that 3 workers are needed for every one beneficiary for Social Security to remain viable. Today there are 2.9 workers contributing to social security for every retiree receiving benefits (2012 Guide To Social Security; Mercer). By the year 2030, that number is expected to drop to 2.1 workers per retiree (2012 Guide To Social Security; Mercer).

What’s  more, someone  retiring at age  65 today can expect to live another 19 years (U.S. Department of Health and Human Services, Centers for Disease Control).  So, fewer workers are paying in to the system and more workers are receiving benefits for a longer period of time. It’s a demographic shift that you and I can’t control.

What changes do you need to make in your retirement planning today?

If you are younger than age 50: I often advise that you assume no benefits will be available or that benefits will be about half what they are today. This is pretty extreme, but it forces you to avoid relying on what may be a less-than-certain source of income in the future. If we bet wrong, and social security is there to pay a benefit, then it’s icing on the cake. If our hunch is right, then we’ve planned for that outcome and are financially and mentally prepared for it.

For individuals over age 50: You might have to be more conservative in your assumptions about social security as well. I believe the program will exist in 2025 when I become eligible to start taking benefits, but I also believe that the program will be very different than it is today. Perhaps benefits will be reduced. Perhaps full social security benefits will be available at a later age. I don’t know. Politically, it may be difficult for Congress to reduce benefits on current retirees. More likely they will raise the payroll tax, delay the age at which retirees can receive full benefits, and/or modify the Cost of Living Adjustments.

In any case, social security planning, maximizing your benefits, and anticipating changes to the system in the future will be key to including social security in your retirement plans.

What role does social security play in your financial plan?