No, Social Security Isn’t Going Broke. 5 Shortfall Myths, Busted

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A new trustee’s report provides some scary projections about Social Security’s future. Social Security’s trust is now expected to be depleted by 2034. That’s one year sooner than originally estimated, in part due to the economic shock of COVID-19.

Taken out of context, the numbers look frightening. But if you understand how Social Security works, you’ll see that things aren’t quite so dire.

5 Things Everyone Gets Wrong About Social Security’s Shortfall

You may hear that “Social Security is going broke” or that Social Security won’t be around for you. Neither statement is true. Here are five common myths about Social Security’s future.

1. Myth: Social Security Will Run Out of Money in 2034

The truth: Social Security now pays more in benefits than it rakes in through payroll taxes. But workers are still paying into the system. As long as they continue to pay in, Social Security won’t go broke.

For decades, Social Security took in more than it paid out in benefits. That’s how it amassed $2.9 trillion in reserves. The latest projections estimate that those reserves will only last until 2034. At that point, Social Security will still bring in money from payroll taxes. But payroll taxes alone would fund just 78% of Social Security’s obligations.

2. Myth: You’ll Only Get 78% of Your Projected Benefits

The truth: It’s true that Social Security will only have enough to pay 78% of projected benefits by 2034. But that’s if Congress does nothing. That seems highly unlikely. Social Security is widely popular with voters across the political spectrum.

Lawmakers could raise the full retirement age, as they did in 1983. They could also  increase the payroll tax rate or raise the ceiling on payroll taxes. In 2021, workers pay Social Security taxes only on the first $142,800 of earnings. Congress could also borrow more money to make up for the impending shortfall.

3. Myth: If You’re in Your 20s or 30s, You Shouldn’t Expect Benefits

The truth: Again, even if Congress takes no action, Social Security could still pay for 78% of the benefits it’s promised come 2034. Even the youngest workers can expect to receive benefits someday. By 2095, payroll taxes would still cover about 74% of scheduled payments.

4. Myth: The Government Drains Social Security to Pay for Other Programs.

The truth: Social Security has two trust funds: One pays retirement and survivor benefits. The other pays disability benefits. Both are funded through payroll taxes. Neither is used for the general fund, which finances the federal government’s operations.

There’s a bit of truth to this myth, though: Social Security invests its money in U.S. Treasury securities. These are bonds issued by the federal government. Bonds are debt instruments. The investor (Social Security in this case) is the creditor, and the issuer (the federal government) is the debtor. The federal government then pays that money back to Social Security, plus interest.

Treasury securities are among the safest investments in the world. They’re backed by the full faith and credit of the U.S. government, which has never defaulted on its debt.

5. Myth: Covid-19 Will Have a Dire Impact on Future Benefits

The truth: The trustee’s report estimates actually weren’t as bleak as many forecasters feared. But it’s too early to determine COVID-19’s long-term effects on Social Security.

Hundreds of thousands of lives have been lost to the pandemic. That tragedy lowers Social Security’s short-term costs because fewer people will receive benefits. Forecasters estimate that mortality will remain higher until 2023.

The reduction in costs has been overshadowed by the drop in payroll taxes caused by massive unemployment in 2020. Immigration and birth rates both fell steeply during the pandemic. Both decreases are expected to decrease Social Security revenue over time.

What Does This Mean for You?

Don’t panic over the latest trustee’s report. You can still expect Social Security to be around in 2034 and beyond.

One reality to prepare for as you plan for retirement: Your Social Security checks won’t stretch nearly as far as they did for your grandparents. Social Security cost-of-living adjustments, or COLAs, lag behind the actual cost increases seniors face. Benefits have lost 30% of their purchasing power since 2000, according to The Senior Citizens League.

Social Security replaces about 40% of earnings for an average worker who retires at age 65. Benefits are expected to replace a shrinking percentage of income for younger generations.

It’s essential to start saving for retirement as soon as possible. If your employer offers a 401(k), contribute at least enough to get your company match. Also consider saving in an individual retirement account (IRA).

You can still count on receiving Social Security someday. But your monthly checks should only be one component of your retirement plan.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to [email protected].