Is Social Security…Secure?
A poll run by Nationwide Financial showed that millennials are much less informed about the nature of social security benefits, in general, than prior generations. To me this makes total sense. Since older generations are either already receiving the benefits or are much closer to receiving them than we are, they should know more than we do, right?
I’m a millennial, and I understand that findings like this and articles outright criticizing our generation are annoying; however, when millennials take a poll and objectively answer things incorrectly, that’s just data — not criticism. So! Let’s all be better than those survey results!
What is Social Security?
The History
The social security system was put in place in 1935 during the Great Depression. It was created to promote the economic security of Americans who had lost most of their retirement savings by paying retired workers a continuing income after retirement. 87 years later, social security dollars are still being collected and distributed.
Your Contribution to Social Security
Where does all the money come from to pay social security benefits to retirees? You, ya little worker bee.
When you work, you pay taxes that contribute to the pool of Social Security dollars - 6.2% of each paycheck to be exact. If you’re self employed, you pay 12.4% since you have to foot the tax bill from both an employer and employee standpoint. Those taxes are collected and pay benefits to:
People who have already retired
People who are disabled
Survivors of workers who have died
Dependents of beneficiaries
Social Security Fast Facts
There are multiple ages at which you can start collecting social security. Full retirement age is 67 if you were born in 1960 or later - that’s us! You can claim these benefits as early as age 62, if you’ve worked for at least 10 years — more on that in a bit.
Social security was never designed to fund 100% of your retirement. According to the Social Security Administration (SSA), it’s meant to provide approximately 40% of your pre-retirement income.
Social security isn’t disappearing after 2034, according to experts. The SSA stated the trust that funds monthly payments “will be able to pay full benefits until 2034, and [after that] incoming payroll taxes will be sufficient to pay ~78 percent of scheduled benefits.”
Fast Fact Deep Dive (or should I say Slow Facts?)
Collection Ages
In 2022, there are 3 important ages in the Social Security world — 62, 67, & 70:
62 - If you’ve worked and paid into the Social Security system for at least 10 years, you can start receiving payments at age 62. This is considered an early collection age, and your payout will be discounted for the rest of your life.
67 - This is the age when you are eligible for full retirement benefits, and the payout you receive will be constant for the rest of your life, adjusted for inflation.
70 - You don't have to begin collecting Social Security at age 70, but your benefit will not increase if you delay claiming past your 70th birthday. This is considered a later collection age, and you will get an increased payout for the rest of your life.
The full retirement age used to be 65 but was increased to 67 in 1983 to account for people living and working longer than they did in ‘35 when the system was put in place. There’s been some chatter about the full retirement age increasing again since our life expectancy has continued to rise, the ratio of working to retired people is out of whack, and the pool of social security dollars is dwindling. The eligible collection age may also increase to offset some of these effects, so let’s figure out why there are multiple ages involved and what it would look like if you started collecting at different ages.
Before I throw a bunch of numbers at you…
Understand that your monthly social security payment will be unique to you and will ultimately be determined by how much you paid into the system when you were employed since those contributions were based on a percentage of your income.
So, how do you determine your social security payment for planning purposes?
Calculating how much you’ll receive per month can get a little tricky. The SSA has a quick calculator that uses a few of your inputs to project past and future earnings and spits out an estimate. (I tried the quick calculator, and apparently, the SSA had a lot of faith in my earning potential. Their projections were generous! Expect an inflated calculation.)
They also have a more formalized option that estimates your annual social security payment using both actual and projected dollars which I trust a little more, but, I don’t suggest spending an inordinate amount of time estimating a minority of your future retirement income. Reallocate that time, energy, and money investing (literally!) to create as much of a nest egg as possible. Set a realistic budget, develop a personal savings plan, treat yo self in moderation, and get well versed in your employer-offered savings plans. Every little bit counts!
If you’re new to the saving/investing game or just need a refresher, I highly recommend the book Just Keep Buying by Nick Maggiulli. He lays a solid foundation for beginners and offers new insights to those more seasoned. The author does an insanely good job explaining commonly over-complicated topics plainly, and I can’t recommend it enough!
Suffice it to say I don’t know what your specific social security check will be worth, so let’s look at a basic example.
Pretend your expected monthly social security payment is $1,000 at full retirement age (67), and you’re expected to live to 83. Regardless of the collection age you select, all payments are adjusted annually for inflation. (For purposes of this example, we’re keeping things simple and not adjusting for inflation.)
62 - If you opt to collect social security payments early, they will be discounted by 30% for the rest of your lifetime. In this example, you’d receive $700 per month.
Lifetime payments received: $700 x (21 years * 12 months) = $176,400
67 - If you opt to collect social security payments at the full retirement age, you’ll receive your expected monthly payment of $1,000 for the rest of your lifetime.
Lifetime payments received: $1,000 x (16 years * 12 months) = $192,000
70 - If you opt to collect social security payments at 70 or later, they will be increased by 24% for the rest of your lifetime, and you’ll receive $1,240 per month.
Lifetime payments received: $1,240 x (13 years * 12 months) = $193,440
Depending on your financial situation, accepting less money for a longer period of time may be appealing or even necessary to make ends meet. If you are able to wait until at least the full retirement age to start collecting, the math proves that it could be more advantageous in the long run. Collection age is one of the most hotly debated aspects of social security, so expect conflicting viewpoints on this!
(Click image to enlarge.) The yellow bars show the ages when accepting benefits later becomes more advantageous. If you live to be 78 - 81, waiting until age 67 to accept your payments would prove to be the best option. If you live past 82, waiting until 70 to collect your payments would be the most beneficial. I understand we don’t know how long we’re going to live, but the current life expectancy is age 83 for women in 2022. If you’re playing the averages, waiting until 70 may be the play. However…
You could go down the rabbit hole of trying to figure out if collecting early and investing 100% of your social security payments would get you ahead, but there are a lot of variables to consider like the length of time you plan to be invested, the estimated growth rate associated with that investment time horizon, the capital gains you’d eventually be taxed on, etc. So if you’re feeling daring - have at it!
Social Security was never meant to fully fund your retirement.
I feel this is the most misunderstood fact about the social security system, and it’s just one of many reasons why people are underprepared for retirement. You heard it from the horse’s mouth earlier - the Social Security Administration suggests that social security payments should account for only 40% of your retirement income. That estimate should be discounted even further for those of us set to retire after 2034.
In the earlier example, your annual income from social security would be about $12,000. For perspective, that annualized salary is less than those making minimum wage today. If $12,000 accounts for only 40% of your retirement income (like the SSA suggests), you’d be responsible for coming up with the additional 60%, or $18,000, to live off each year. In this example, they’re assuming $30,000 would be sufficient to cover all of your retirement expenses, and honestly, I wouldn’t rely on the Social Security Administration to guide your retirement savings plan. They have no earthly idea what your monthly spending habits are, so it’s up to you to determine what your annual retirement “salary” should be to adequately meet your needs.
If you’re a skeptic and would rather treat social security payments as bonuses, keeping them out of sight, out of mind during retirement planning, you can do a little backward math to figure out how much you’ll need to have invested to fund your retirement (for approximately 30-50 years) by using the 4% rule. It’s a frequently used rule of thumb for retirement spending where you add up all your investments and withdraw 4% of the total each year, adjusted for inflation. Using our example above, you’d need to have roughly $750,000 invested to withdraw the necessary $30,000 every year comfortably. (We’ll do a whole article on this soon — stay tuned!)
According to experts, Social Security isn’t disappearing after 2034.
Clickbait headlines will lead you to believe that after 2034, social security will be a thing of the past. There will be zero dollars left, the world will come crashing down, and the rest of us are SOL. I’m here to reassure you that experts believe this is not the case! (This statement assumes the system as we know it today stays in tact. Obviously, if legislation is introduced to end the system altogether, then it would be very much unsecure. Since both you and I have no idea if that will happen, we have to operate with the facts we have today.)
If people keep working and the government keeps collecting social security taxes, the system will remain funded. However, a declining workforce, a rising number of retirees, and an increased life expectancy all contribute to a shrinking pool of social security dollars Millennials will have to draw from. The looming threat of a retirement age increase could impact our generation even further.
Declining Workforce - According to the SSA, “Today 12 percent of the total population is aged 65 or older, but by 2080, it will be 23 percent. At the same time, the working-age population is shrinking from 60 percent today to a projected 54 percent in 2080.”
I realize this stat projects well into the future, but those numbers won’t come to fruition overnight — it’ll happen over time. Working people fund the system. If the number of working people declines and the number of beneficiaries (aka, retired people) increases, the ratios are off. You have more people collecting money than contributing money, right? Everyone will still get their piece of the pie, but it’ll be a smaller pie — about 20% smaller, according to the SSA.
The working class decline can be attributed to a wide variety of factors, according to the U.S. Bureau for Labor Statistics, including an increase in imports from China, unforeseen layoffs related to the pandemic, an increase in automated jobs, the rising cost of childcare, and increased incarceration rates, to name a few.
Increased Life Expectancy - As retirement age stays constant and our life expectancy increases, the number of social security payments also increases. I don’t think anyone is going to be mad about us all living longer, but there are some consequences that come with the upside.
Increased Retirement Age - As people live longer, I suppose it’s relatively reasonable to assume the allowable collection and full retirement ages would have to eventually increase if we want the system to remain funded, which, for the record, was THE most painful sentence I’ve ever written. This hasn’t been confirmed, but since it’s happened before and history often repeats itself, I don’t think it’s out of the realm of possibility.
So, is the system secure?
For Millennials, I think the answer is “yes with an asterisk.” You can still expect to receive payments, but they’ll be discounted by roughly 20%…for now.
The holidays are on the horizon, so if you plan to engage in a “my future is much more bleak than your life was” discussion with your elders this Thanksgiving, know that you definitely have the upper hand when it comes to social security arguments. 😏
Also, if you’re interested in keeping up with the future of social security, keep an eye on headlines around the topic in mid-October. The Social Security Administration is set to release the latest COLA (cost of living adjustment) for current beneficiaries. Since the percentage increase in payments is determined by looking at Q3, year-over-year inflation rates, experts were expecting the hike in payments to be pretty substantial given the wild inflation you’ve heard everyone talking about this year. Turns our their estimates were a little high, which could signal a slow in inflation? Only time will tell!