What's the Outlook for Social Security?
08/01/2011 - Will Social Security be available for you when you retire? Based on how much chatter and misinformation surrounds the subject, you may be surprised by the answer. Barring dramatic changes, Social Security will continue to provide benefits for all future retirees, including you. The real question is how much you will receive in benefits.
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A "pay as you go" program
It is important to understand just how Social Security is structured. While the system faces financial challenges due in large part to demographic trends of a large baby boomer population retiring, it is not "going broke" as many have stated.
The primary source of benefits for current retirees is the Social Security (FICA) tax paid by working Americans. This is an ongoing source of revenue for the program. Therefore, benefits will be available indefinitely assuming the FICA tax remains in place.
What concerns forecasters is that, along with ongoing tax receipts, the Social Security program has become increasingly dependent on a "trust fund" that has been building for decades. The trust fund is a pool of money that represents the excess of tax receipts generated over the years beyond what was needed to pay current benefits. As the large baby boomer population begins to retire, the trust fund will slowly be depleted in order to fulfill all promised benefits to retirees.
Life after the trust fund
The only part of Social Security that is "going broke" is the trust fund. It is projected that if no changes to benefits or the tax structure occur, the trust fund will be depleted by about 2037.
The trust fund has faced challenges before. In the 1980s, changes to the tax rate and benefits eligibility were put in place in order to delay the potential depletion of the trust fund. It is possible that additional changes will be implemented at some point in the future to extend the life of the trust fund and maintain benefit levels that are close to what future retirees expect to receive.
But even if the trust fund is exhausted, benefits should continue. The Social Security Administration estimates that ongoing revenues to the program (through the FICA tax) will generate sufficient dollars to provide benefits equal to at least 75% of what future retirees would expect to receive based on the current structure after 2037.
The ongoing uncertainty about funding for Social Security creates issues for those who are trying to plan for their needs in retirement. While you should be able to count on some form of Social Security well into the future, it is prudent to use conservative estimates. Assume that monthly payments will be only about 75% of what you may have previously anticipated, and plan on overcoming the gap with dollars generated by personal savings. This may require you to commit more dollars toward your retirement, even though some form of Social Security will most likely be around for you when you retire.
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