Pop quiz. What are the chances the Social Security program will be around when today's Millennials reach retirement?
Listen to talk around the water cooler or in a group of family or friends and you have probably heard someone say to a younger individual, “You better plan ahead because Social Security won’t even be there by the time you get to retirement.”
They’re wrong. Social Security isn’t going anywhere. The best answer to the pop quiz is (A).
To understand why, think of Social Security like an old farmer.
For years, the farmer works diligently, saves his profits, and perhaps buys more land periodically. After decades of planting and harvesting, the farmer is the proud owner of a large block of crop land. What’s more, pretend the old farmer was not only a diligent worker but a diligent saver too. In addition to investing in more land, he also started a retirement account and faithfully contributed to it each year. Over time, this retirement account grew to a substantial sum.
Now, imagine the old farmer decides to retire and places his considerable crop acres into an irrevocable trust that allows him to spend any earnings generated each year, but it prohibits him from selling a single acre.
He rents his land to a younger, up-and-coming farmer, producing an annual rent payment that entirely covers the old farmer’s living expenses. Assuming his rent payment increases with inflation and his spending doesn’t rise disproportionately, he owns an asset that could last him until he enters his heavenly pasture. He wouldn’t even have to touch his substantial retirement account.
Instead of living within his means, however, let’s now pretend the old farmer has made several promises to his wife and children.
Let’s say before he retired the old farmer assured his wife they would build a new house and take an international vacation each year. He also agreed to buy each of his children a new vehicle every five years.
His rent payment isn’t enough to cover these promises, though. So the old farmer dips into his retirement account. He has enough to pay for the new house outright, and for a period of time he is able to pay for the international vacations and new cars. Before long, though, the old farmer notices his retirement account is perilously low. In fact, it will only fund a couple more vacations and one or two more new vehicles.
Something has to give.
If the old farmer can’t raise the rent payment on the land, his only option is to renege on his promises to his wife and children. It’s not a fun prospect, but he’s left with no other choice.
That’s about where the Social Security program stands at the present time.
We have nearly blown through our retirement account (otherwise known as the Social Security trust funds), and if nothing changes, we will have to make do with our annual rent payment alone (otherwise known as the Social Security withholding tax levied on current workers’ wages).
As a result, while Social Security may not be able to cover its past promises in the near future, it is certainly not completely unfunded. The ongoing income tax the government collects on each worker’s paycheck will make sure of that.
In other words, Social Security isn’t going away. It will always be there – barring an act of Congress.
Will the benefits be the same? Perhaps not. In fact, the Social Security Administration states on its website that unless legislation is enacted “to restore long-term solvency…about three-quarters of scheduled benefits could be paid in each year” once the trust funds are depleted.
Here’s what that practically means. If a retiree is currently getting $1,000 a month in Social Security payments, once the trust funds are emptied, that same retiree’s payment is expected to decrease to roughly $750 a month.
But it won’t be reduced to zero – not for current retirees, nor future retirees. However, like the overspending old farmer backtracking on his promises, Social Security may be forced to “live off the land,” so to speak.
That is, unless we raise the rent.