By Dr. James M. Dahle, WCI Founder
How safe is Social Security? I hear a lot of people say, “You can't count on Social Security.” Apparently, three-quarters of Americans are worried the program will go away. I don't. I think you absolutely should include it in your retirement calculations. Let's go through the reasons why I think Social Security is still a safe bet.
#1 Social Security Is Not Running Out of Money
About once a year a series of articles goes around talking about how, “Social Security is going to run out of money in 20**!” Aside from the fact that the date gets pushed back every year, the people buying into these articles (and presumably those writing them) don't have any idea what they are talking about.
First, there is no money in the “Social Security Fund.” The money that's there is just treasuries. That's right, government IOUs. The only thing that stands behind the “Social Security Promise” is the taxpayer. And we're not talking about some money that was withheld from paychecks as FICA tax. We're talking about money that will be withheld from FUTURE paychecks as FICA tax.
Second (and more importantly), when they say it is going to run out, they're saying that the tax coming in is not going to cover the benefits going out. Mostly that is just a function of there being a higher ratio of retirees than workers due to demographics and improving longevity.
Third, let me explain what “running out” means. It means that instead of getting 100% of what you were promised, you'll get 75%-80% of what you were promised. Not nothing. There's a big difference between 80% and 0%.
#2 Social Security Is Very Popular
People love Social Security. Democrats love it. Republicans love it. Retirees love it. Millennials love it. Black, white, brown, and green people love it. Rich people love it. Poor people love it. I often survey a room asking who would like the program to go away. In a room of 100, I usually get one or two people raising their hands. More formal surveys have similar findings—75%-85% of people have a positive view of Social Security.
In an AARP survey taken in 2020, more than 90% of respondents supported Social Security.
Now, I'm not here to debate whether it should be popular or whether it is a good program. You can go to a politics forum and debate that if you like. What I am telling you is that it is popular. In fact, it might be the most popular program the government has. Given how polarized the country's politics are, most programs are loved by half the country and hated by half the country. So, when you have a program that 3/4 or more of the country likes, you can be pretty sure it isn't going anywhere. Imagine what happens to a politician when they try to eliminate a program that 59% of their own party loves? The politician is not there very long. So, if this program has problems, the problems are going to be fixed. It isn't going away.
#3 Social Security Is Easy to Fix
We have lots of problems in our country that are hard to fix, such as the runaway costs of medical care and education. But the “Social Security problem” isn't hard to fix. There are five fixes, any one of which would work. The best approach is probably some combination of them. These include:
- Raise the Social Security tax rate
- Raise the Social Security tax base
- Decrease benefit amount
- Decrease the inflation adjustment on benefits
- Increase the age at which you can take Social Security
Now, politicians and reasonable people disagree on how much of one and how much of another solution should be included in the “fix,” but fix it they will. Personally, I think the most likely fix is a combination of 2, 4, and 5, but for the purposes of this discussion, that really doesn't matter. The point is that the will is there to fix it and the solutions aren't complicated. Unlike fixing the Medicare problem.
#4 You Should Make Your Financial Plans Based on Current Law
As a general rule, you should draw up your financial plans and base your decisions on current law. Yes, laws can and will change. But it is almost impossible to predict in advance which way they will go. Tax rates can go up or down. Interest rates can go up or down. Social Security benefits can increase or decrease. But the best predictor of future law is current law, so you might as well act mostly as if the laws aren't going to change. Perhaps you hedge your bets a little by saving a little more or doing some Roth conversions or whatever, but for the most part, just act as if our current laws will still be there in 30 years. Because most of them will be.
#5 You Will Oversave If You Don't Count on Social Security
A number of years ago, I wrote a post about the consequences of assuming Social Security is going away in your financial plan. The more you have, the less it matters. But for most Americans, including doctors and other high-income professionals, Social Security will make up 25%-75%+ of your retirement income. A typical married physician retiree couple is looking at a benefit of $40,000+ a year these days. That's similar to what you could spend from a $1 million portfolio. How much longer will you need to work to have an extra $1 million? Probably at least several years.
Social Security is a very popular, easy-to-fix program. Go ahead and count on having at least 75% of your promised benefit when drafting up your retirement plans.
What do you think? Do you think it is safe to count on Social Security? Why or why not? Comment below!
I agree with you that I don’t think Social Security is going anywhere. But I still didn’t include it in my retirement calculations. I’m planning to retire before age 62 and definitely before full retirement age of 70. Counting on it may serve as an excuse not to save as much for some people and can lead to a slippery slope. I just consider any social security benefit icing on the cake. Not saying my way is right but that’s how I do it!
The Prudent Plastic Surgeon
TPPS – Not in any way trying to sound negative or dampen your new-found interest in blogging, but there is no way at your age you can conceive of how you will employ your Social Security benefit. Of course, this is just my opinion. Quite frankly, things and events happen in life that will absolutely influence your decision. There are many bumps in the road ahead of you which will can cause rethinking and reexamining of your personal and family situation. That’s just the way life is. The beauty of Social Security is that is does provide some options (for both you and your spouse)that can be tailored to your individual situation when you reach a certain age. “Be rigid in your planning, but flexible in your execution.”
Started collecting at full retirement benefits. Worked that year until mid March and lived off savings until first check arrived in August. So happened that because I worked part of that year and a year end company bonus put me in the 85 percent tax on SS. So I collected 5 months but gave back 2.3 months of the benefits in tax.
The $25,000 single is ok I guess but the $32,000 for married couples stinks. It should be $50,000. We get a marriage penalty not once but twice if both are on SS. And no claim married filing separately does not work by their rules. As SS rules say must have lived apart.
We should flood Congress on this amount and discrimination of Married couples. The amount was set in 1988 when they started taxing SS and has not changed. Ps a Biden bill that became law.
What happened to reasons 6-8?
That’s a great question. You would have thought we would have caught that in the editorial process eh?
Excellent points. However, I worry most about solution #6 – means testing SS benefits. Since the rich, in the minds of the rising left, have managed to go through life “without paying their fair share” means testing SS will be the excuse for righting this wrong. It will be the most politically expedient excuse.
If you look at the “rising left,” they are generally more in favor of universal programs. “Moderate” Democrat’s and Republicans are far more likely to suggest means testing.
One example, Pete Buttigieg arguing that Bernie’s tuition free college for all plan was bad because he didn’t think “rich kids” should be going to school for free.
Exactly. Quick way to kill a popular program? Means test it. Cost of allowing the top 1% to take a full SS. Benefit? About 1%. Cost if they don’t get the benefit? They $upport politicians who will degrade the program.
They’re already means tested in at least two ways. The wealthy pay taxes on 85% of it. The impoverished pay very little on it. The impoverished also get far more bang for their buck (i.e. a higher return) on the SS contributions they do make.
Social security is definitely going to have to change. As medicine advances the population base will live longer and thus have a larger burden on the system.
I believe when the program first came out retirees were only expected to live less than 5 years from time of eligibility. Now it is measured in decades.
In all likelihood it will be a combination of increasing age eligibility, decreasing benefit amount, and increasing the tax base (raising social security tax limit).
Early retirees face the issue that their benefit is reduced already because of the number of years assigned $0 that social security takes into account to make up the final value in its calculations.
Great post! The title says 8 reasons, but I count just 5. What am I missing here?
Fake news.
No, you’re fake news!
#6 You might need it.
#7 You’ve already paid for it.
#8 David Soul said so.
What does Starsky and Hutch have to do with Social Security?
WCI you might never have listened to “Don’t give up on Us” by David Soul! It was released back in 1976.
Via email:
This was the best article i have read on here yet!! Makes me feel much better about including SS! Thanks Dr Dahle
You might get a SS benefit, but it’ll just be taxed so that the money never shows up. Just like they could send me a COVID check, but I’d pay tax on that and let’s face it, the funding for the program is coming from my taxes and inflation to begin with.
I am 15 months from the second bend point. Academically interested in seeing what happens in 25 years.
Most programs are never fully taxed. So you would still get 40-60% of the benefit even in the highest bracket. But yes, high earners are still paying for the lion’s share of the programs under our progressive tax system.
So when are you going to write “5 reasons not to give up on your Illinois pension retirement?” 😉
Illinois has a significant disadvantage when compared to the federal government…they cannot print money nor can they control the interest rates on their debt.
#3 and #5 are really the exact same thing. I’d love for my full retirement age to be 66 instead of 67. I’d love to collect at 70 and see an 8. % increase in benefits for 4 years. But alas, I only get that increase for 3 years.
Here is the data from social security (see https://www.ssa.gov/oact/tr/). The government prose is a bit terse, but the best I can make out is the following for the past few years (OASI data only).
2016 Report: Trust fund depleted in 2034, estimated SS payout 79% of benefits
2017 Report: Trust fund depleted in 2035, estimated SS payout 77% of benefits
2018 Report: Trust fund depleted in 2034, estimated SS payout 75% of benefits
2019 Report: Trust fund depleted in 2034, estimated SS payout 77% of benefits
2020 Report: Trust fund depleted in 2034, estimated SS payout 76% of benefits
It appears that the social security trust fund “depletion years” are not being pushed back anymore. Also of note is that the percent of benefits that can be paid out from incoming revenue is fluctuating but overall down from 2016. It will be interesting to see the 2021 report when the COVID-19 pandemic effects may show up.
So that would suggest the political pressure to “fix” it will build in the next decade.
I am not counting on SS to give me much of a boost. However, I do believe it will have to evolve into something and not go to 0. Something of that magnitude would likely wreck the United States… Far to many people completely depend on SS to live…
I am shooting for that $2 Million Dollar portfolio that should kick off around $80k / year for living.. I’m anticipating that SS will be there enough to cover all the necessary taxes I’ll have to pay so I’m not have to take more out to get to that $80k/ year AFTER -TAXES.
I don’t even use SS in my considerations… but I also chose to ignore taxes I’ll have to pay and hope the two cancel each other out.
That’s probably a fair way to do it, although it is unlikely you’ll pay 33% on just $120K in income.
Outstanding post, but I’m sure a handful of forum-trolls won’t like this…. Too political for their liking sadly….
Hoping we age in to 70 under the wire with no means testing (2033) so our combined is 96K. While I don’t count on it in planning, that would be almost 50% of annual expenses allowing taxable portfolios and ROTH IRA to grow unchecked. 15% tax on qualified dividends on income under 496K. Get other half from RMDs. up to 35% tax. Ouch. That’s the plan anyway.
I agree that the system will not go away. It will not likely be the same in 30 years, but I suspect it will still be here. I never used it in any of my planning for retirement. Since I planned from medical school to retire at age 50, more than a decade before I would be eligible to collect, I left social security out of the equation. Then if I get it, it will just be a bonus. I’m adding this to my Fawcett’s Favorites next Monday.
Thanks,
Dr. Cory S. Fawcett
Financial Success MD
If you retire long before Social Security age, you basically have to plan to survive without it just because of the way the numbers work. A portfolio that can sustain you for 20 years is not very much smaller than one that can sustain you indefinitely.
You forgot another fix for Social Security. It’s the one that was advocated by Pres. Trump.
Simply decrease the unemployment rate in the US. More people working under the current system equals more money coming in. Both FICA and personal income tax. And before COVID-19, that is exactly what was happening.
Agree or disagree with his policies, unemployment was extremely low. And SSA “revenue” was high.
Interesting. An excellent point, although one that is difficult to solve long-term with policy.
The unemployment rate is high RIGHT NOW under Trump, though. I’m not making a political point, it’s just that the POTUS doesn’t determine the unemployment rate. I suspect William didn’t care for Trump’s predecessor’s policies but the economy was similarly strong then.
Unemployment numbers were much higher under Obama. They were at record lows under Trumpy before COVID-19.
And if we bring jobs back to the states, there’s a lot more money going into the plan. 12% of all wages.
Sickly, it’s the only way to fix it w/o cuts. Love or hate Mr. Trump, he is right on this one.
The popularity of SS depends on the ages of the people you ask. My kids consider it to be a simple Ponzi scheme that will continue to take a lot of money from them for years and blow up long before they retire. If they could kill it today they would do so.
I agree that SOMETHING will survive. After all, we will have all these retirees who paid in for decades. It would be politically impossible to leave them with nothing. That does not mean that relatively higher income people, like physicians, will benefit. The problem with raising the wage base and tax rate is that it does not solve the huge amount of money that has to go to pay benefits. It would increase the revenue somewhat, but it would be another stop gap measure with huge political opposition from younger people. And from older people who care about their children’s futures.
Means testing the benefits, reducing them sharply for those with higher net worth, would address this problem. For that reason, I think it will be part of any solution .
That means planning for a retirement with little or nothing from SS. Which is what I do.
If I get more than nothing, that will be great. But it will be a pleasant surprise.
Your children will appreciate your plan to not need it as it will likely mean their inheritance is larger.
Here’s how my father and grandfather viewed social security (both on opposing political camps, too!), which has always stuck with me… From a personal finance standpoint, pay little mind to it during accumulation years of one’s career. Tune out the noise and alarmism, which has been obviously going around for years and years. Instead, contribute to tax-advantaged accounts, budget, and live below one’s means. Factor in social security for your plans near the latter years to have a firmer idea of what retired life will look like. During retirement, both were financially secure and donated the monthly check to charitable organizations.
Now obviously, this advice isn’t too helpful for the doc who is still paying off loans many years after his or her residency (and will most likely depend on the program in retirement). But maybe others could benefit. Good blog post promoting some nuance and a fresh perspective!
The Social Security administration estimates my wife and I will receive $66K when we start drawing Social Security in five years. We won’t need it but will gladly take it. That will cover half our annual budget and leave more to hand down to our kids.
Social Security is not a tax. It was touted as a forced retirement plan. It’s the only way that it got through the legislature.
That’s why people with high incomes don’t pay a higher rate. And why there is a cut off on earnings from work.
What ever. Government makes promises all the time that they don’t keep. So raise the rates and eliminate the cut off.
1) Consider the effect of raising the minimum wage. This article estimates that 25.2 million people are paid $11/hr or less. As the minimum wage increases, contributions to Social Security increase. https://tcf.org/content/commentary/making-economic-case-15-minimum-wage/
2) Yes, it’s a matter of concern that we have fewer current earners per retiree. However, look at the total picture. In the “good old days,” the sole breadwinner supporting 1/16 of a retiree was also supporting a spouse and a few children. Now it’s more typical to have two breadwinners and two children.
1. Another interesting solution which at first glance should work. Unless it results in fewer jobs, in which case it actually decreases total SS contributions. Better to have three jobs paying $10 an hour than one job paying $20 an hour when it comes to total contributions.