The Social Security program has been a vital safety net for millions of Americans since its creation in 1935. However, there are growing concerns about its solvency and ability to provide adequate benefits in the coming decades. I believe individuals should not rely solely or even primarily on Social Security benefits for their retirement income. There are several risks that could significantly reduce or even eliminate benefits. Being proactive and making alternative retirement plans is absolutely essential.
Why Social Security is Facing Massive Funding Shortfalls
Social Security is facing a severe funding crisis that threatens its ability to pay full scheduled benefits. According to the 2022 Social Security Trustees Report, the program will only be able to pay 77% of promised benefits by 2034 when the Trust Fund reserves are fully depleted. This is an extremely alarming finding, given over 65 million Americans currently receive Social Security benefits that represent a crucial source of income.
Several key factors have contributed to the rapid deterioration in Social Security’s financial condition:
- Increased life expectancies mean retirees are living longer and collecting benefits for longer periods than in the past. In 1940, average life expectancy at age 65 was only 12 years for men and 14 years for women. Today, it has risen to 18 years for men and 21 years for women – adding 6-7 more years of required benefit payments.
- The massive Baby Boomer generation is swelling the beneficiary rolls as they move into retirement age. Every day over 10,000 Baby Boomers turn 65 years old, shifting them from taxpayers funding the system to recipients drawing benefits from it.
- Declining birth rates mean fewer workers paying into the system through payroll taxes to fund the benefits being paid out. The ratio of workers paying Social Security taxes compared to retirees receiving benefits has fallen dramatically from 16.5 workers per beneficiary in 1950 to just 2.8 workers per beneficiary today.
- Slow wage growth over the past few decades has severely limited payroll tax revenue gains. Income above $142,800 is exempt from Social Security payroll taxes. With wage growth lagging, a declining share of total worker earnings has fallen under the taxable maximum, dropping from 90% in 1983 to just 83% in 2018.
These issues of increased longevity, shifting demographics, lower fertility, and wage stagnation have combined to rapidly worsen Social Security’s financial situation. Absent meaningful reforms, the system will struggle to maintain solvency and meet its benefit obligations to the millions of Americans depending on it.
“By 2034, it’s projected that the Social Security Trust Fund will be depleted, leading to potential benefit cuts unless significant reforms are implemented.”
Deep Benefit Cuts are Likely Coming
As payroll tax revenues fail to keep pace with rising beneficiary obligations, Social Security will have no choice but to tap into its Trust Fund reserves to maintain full scheduled benefits. However, once this buffer is fully depleted, automatic across-the-board benefit cuts of 23% may be required by law starting in 2034 in order to match the reduced incoming payroll tax income.
To illustrate the potential impact – the average monthly benefit paid to a retired worker is currently about $1,565 as of January 2022. A 23% cut would mean this retiree’s monthly check would be slashed by $360 down to $1,205 – a substantial reduction in income that could seriously impact their living standards.
Additionally, even deeper benefit cuts could also occur in the future if Congress took actions like:
- Raising the full retirement age beyond the currently scheduled age of 67, which would lower monthly benefit payments for those claiming earlier.
- Altering the Social Security cost-of-living adjustment formula to reduce the annual COLA benefit increases.
- Implementing means-testing provisions that would reduce benefits or provide no payments to retirees with incomes above a certain threshold.
While such policy changes would be politically contentious, some level of benefit reductions seems highly likely given the fiscal crunch facing Social Security. Retirees who are 100% reliant on Social Security for their living expenses could see their incomes drop by 20% or more in the coming years if their monthly payments are slashed due to the funding crisis.
Purchasing Power of Benefits Has Already Declined Substantially
Not only are severe benefit cuts probable in the future, but Social Security income already provides much less purchasing power and value than it once did historically. For example:
- Back in 2000, the average monthly Social Security benefit was $816 while the average monthly rent for housing was $602. This meant the average benefit provided 75% of the income needed to cover rent costs.
- In 2022, the average monthly Social Security benefit has risen to $1,565 but average monthly rent costs have jumped to $1,327. Thus, the current average benefit now only provides 48% of the income needed to pay the rent – a substantial decline.
This erosion in the buying power of Social Security benefits, even before any future cuts, shows that current beneficiaries likely have to scrape by to pay for essentials like housing, food, transportation, and medical care. If their payments are reduced further due to Trust Fund insolvency, even fewer retirees may be able to fully depend on Social Security.
| Average Monthly Social Security Benefit | $1,503 (as of 2023) |
|---|---|
| Poverty Line (Single Individual) | $1,073 (as of 2023) |
As evident from the above table, even with Social Security benefits, a significant portion of retirees would still fall below the poverty line. This stark reality highlights the importance of seeking additional sources of income for retirement.
Political Risks Raise Uncertainty Around Social Security’s Future
Various reform proposals that have been suggested by politicians and lawmakers also raise risks around Social Security’s future structure and role as retirement support:
- Some policymakers advocate privatizing Social Security by allowing workers to invest some or all of their payroll tax contributions into personal investment accounts. However, this would expose worker’s retirements to market risk and the potential for investment losses.
- Many proposals involve means-testing Social Security, which would involve reducing or eliminating benefits for retirees with incomes above certain thresholds. While this would improve solvency, it could also erode political support by shifting Social Security from a universal program to an uneven welfare system.
- There are also calls by some politicians to make Social Security voluntary so that workers can opt out of the system entirely. If this occurred and many workers chose to stop paying payroll taxes, revenues could plummet and insolvency arrive even sooner.
These types of potential changes illustrate how Social Security could be transformed from a broad social insurance program into a limited safety net with fewer protections. This uncertainty means workers cannot take Social Security’s structure or role in retirement for granted going forward.
Federal Government Has Repeatedly Raided Social Security Trust Fund
Perhaps most concerning is the fact that the federal government has repeatedly raided and borrowed money from Social Security’s Trust Fund reserves over the decades to finance other programs and expenses. This trust fund raiding has totaled nearly $3 trillion since the 1960’s with no full repayment – only IOUs.
In fiscal year 2022 alone, Social Security’s net cashflow position is a negative $101 billion. This enormous deficit exists because the program must now repay those IOUs with interest, rather than receiving real cash funding to finance benefits.
This habitual practice of politicians is extremely troubling. It exemplifies how they view Social Security merely as a piggy bank that can be raided to cover financial shortfalls elsewhere rather than treating it as the earned benefit that it is. American workers paid into the system consistently with the promise of receiving retirement support. The use of Social Security funding to plug unrelated budget gaps signals those promises may not be honored going forward.
“Since its inception, the government has borrowed over $2.9 trillion from the Social Security Trust Fund, leaving it with nothing but IOUs.”
Conclusion: Take Charge of Your Retirement Preparedness
Given the major financial shortfalls, eroding buying power, political uncertainties, and history of trust fund raiding facing Social Security, relying upon it as one’s sole or primary source of income in retirement seems extremely risky at this juncture.
The responsible path forward is to take proactive steps to reduce your personal exposure and shore up your own retirement preparedness:
- Save Aggressively – Maximize contributions to tax-advantaged retirement vehicles like 401(k)s and IRAs to accumulate substantial private savings that can supplement any future Social Security payments. Our Building Wealth Through Smart Investing guide provides a roadmap.
- Delay Claiming – Waiting until age 70, if possible, to claim Social Security maximizes monthly benefits and provides more income if cuts occur down the road.
- Have a Backup Plan – Develop contingency plans such as working part-time in retirement or relocating to reduce costs of living in case Social Security cannot fully cover expenses after benefit reductions.
- Advocate for Reforms – Contact your elected representatives to press for responsible reforms to Social Security that will restore its solvency for future generations. Remind them of the promise made to those who paid into the system throughout their working lives.
While policymakers continue debating reforms, individuals must recognize the risks of relying substantially on Social Security benefits. By taking control of your own retirement preparedness, you can insulate yourself against potential program cuts.
