If you’ve wondered if there will be any cash left in the federal coffers to help cover your medical and other expenses in retirement, here’s what you need to know about social security.

You've read the headlines: "Social security is going bankrupt!" You may have even thought, Well, social security will be out of cash by the time I retire, so I don't really need to pay attention to what's going on.

While it is true that demographic shifts (more on those in a minute) will cause the social security trust fund to be cash-strapped in the future, the reality, as always, is a little more complex. 

Everything You Need to Know About Social Security
Credit: Adobe Stock

What is social security?

Back story first: In 1935, as part of the New Deal, President Franklin D. Roosevelt signed the Social Security Act. The idea was to give retired workers a source of income and "promote the economic security of the nation's people." According to the Social Security Administration (SSA), the arm of the federal government that oversees the plan, in 2019 more than 63 million people received benefits. About 47 million of those were retirees and their dependents. About 10 million were disabled workers and their dependents. The rest were survivors of deceased workers. 

Money for social security is collected through taxes and placed in a trust fund. (Technically, there are two trusts, one for old age and survivors and one for disability insurance. For the purposes of this explainer, we're focusing on the former.) Even if you haven't been aware of it, you've been paying into this fund as you paid your payroll taxes. If you work for someone else, they pay a 6.2% tax into social security on your behalf, and you pay 6.2%. If you are self-employed, you pay the whole 12.4% (and then deduct some on your tax return).

Is social security really going bankrupt?

People live longer now than they did generations ago; life expectancy is 79 years in 2019 as compared with 62 in 1935. This means that when you retire, you will join the largest-yet (and most expensive, given the medical expenses that tend to come with old age) generation of retirees. Because of this—and because demographic trends mean more people are retiring each year (about 10,000 people turn 65 every year, according to the US Census Bureau)—the amount of money in that social security trust fund is decreasing. 

Economists do predict that the social security trusts will run out by 2037, but that doesn't actually mean the pot will be totally empty by the time you're ready to retire. Despite the hubbub in the media, social security is not going bankrupt—not technically.

There are a few reasons for the misconceptions: Even when the trust fund is spent, younger workers will be continuing to pay taxes, and that should cover 76% of scheduled benefits to those who will have retired by then. By 2083, it dips to 73%. Of course, that's not exactly good news, but it's not zero dollars either. 

How to plan for your retirement, considering

Linda Grant-Smith, CFP, senior financial planner at at Robert W. Baird & Co. in Nashville, recommends that her clients start their retirement planning by logging into the SSA website and seeing what the SSA has calculated as their earnings to date. You will have to create an account to get started.

The SSA calculates what your benefits will be based on your earnings. (Hot tip, self-employed folks: Grant-Smith says she sees more errors in the SSA reports for the self-employed than for those who have an employer, so it is worth checking those numbers against your tax returns when you log in.) Once you have worked about 10 years, you'll qualify to receive benefits on your retirement. 

The SSA figure is an estimate of what you may receive and is intended to supplement your own retirement savings. Brian Walsh, CFP, at personal finance company SoFi, doesn't recommend his young clients check the SSA estimates, instead encouraging them to focus on saving for retirement with other tools. 

The good news

In today's economy, social security is intended to replace between one-third and one-half of the income you made pre-retirement. The actual amounts estimated vary depending on how much you earned over the course of your career. And remember: You're eligible for social security benefits starting at age 62, but you're better off waiting until age 67, when you'll be eligible for larger payments.

In 2021, the maximum is $3,895 per month for someone who starts filing at age 70 and has made among the top earners over the course of their career (the maximum wage taxable by social security for 2022 will be $147,800). The lowest is $628 a month for someone who starts filing at age 62 and had lower income over the course of their career. The SSA uses your top 35 years of earnings to calculate your retirement benefit—so don't panic if you had a bad financial year in 2020 or took a few years off to stay home with kids. 

Benefits do adjust for inflation. For 2022, benefits will increase 5.9%, due to the overall increase of cost of consumer goods. Even if inflation abates and prices go back to pre-pandemic levels, that increase will stick around for the whole year. 

Finally, policy plays a role, too. Walsh believes that the US Congress will make changes to prevent a reduction in social security benefits before it is too late. Suggested fixes, such as changing the retirement age (which has been happening since 1983), increasing payroll taxes, recalculating cost-of-living adjustments, increasing the number of years you need to work before qualifying, or changing the payroll tax have all been bandied about.

Of course, such decisions have political repercussions, so there are no quick fixes. All the more reason to understand what your social security benefit will be, but to continue strategizing for your retirement—from housing costs to medical expenses and beyond—separate from that.

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