It happened again. I found myself in a group of people, listening to an individual caution the others on the dismal state of Social Security. In my mind, I kept thinking, “Don’t say it. Don’t say it.”
I knew if the individual uttered the words I feared, I would have to jump in and give my standard response. I’m sure no one in the group really cared to hear my standard response, but I would feel compelled to make it, just to set the record straight.
As the individual carried on, I repeated to myself, “Don’t say it. I’m begging. Please don’t say it.”
And then, as if on cue, they said it. There it was.
Immediately, almost instinctively, the words started rolling off my tongue. “Actually, that’s not how it works…”
I hear this claim – this lie – often. It’s likely you have heard it, too. It goes something like this:
I’m not even planning on Social Security. By the time I retire, it won’t even be there. All the money will be gone.
There’s one problem with this statement. It’s just not true. Spoiler alert – Social Security is not going anywhere, and it will be there when you retire.
To understand why, think of Social Security like an old farmer.
After decades of planting and harvesting, the farmer is the proud owner of a block of crop land. What’s more, let’s say the old farmer was not only a diligent worker but also a diligent saver. He started a retirement account in his younger days and faithfully contributed to it each year. Over time, this retirement account grew to a sizeable sum.
Now, imagine the old farmer decides to retire and places his crop land into an irrevocable trust and rents the land to a young, up-and-coming farmer. The trust stipulates that he can spend the rent checks each year, but it prohibits him from selling a single acre. Fortunately, the rent checks fully cover his retirement expenses as long as he lives within his means.
But let’s say he doesn’t live within his means. Let’s say he made a few big promises to his family. Before he retired, the old farmer assured his wife they would build a new house and go on a luxury vacation each year. He also told his three children he would buy them new vehicles every few years.
The rent payments from the land, however, are not enough to cover his promises. So, the old farmer dips into his retirement account to make up the difference. After all, that’s why he saved the money in the first place.
For years, the old farmer has enough to pay for his past promises. After a while, though, he notices his retirement account is running dreadfully low. In fact, it won’t even fund another vacation, let alone the cars he promised his children. Something must give.
If he can’t raise the rent on his farm ground, his only option is to backtrack on his promises. It’s not a fun prospect, but he has no other choice.
That’s about where the Social Security system stands at the present time.
We have nearly blown through Social Security’s retirement account, which is known as the Social Security trust fund, and if nothing changes, we will have to make do with the annual rent payment alone. That rent payment comes from a 6.2% tax the government withholds from every paycheck. You pay it, I pay it, and future generations will pay it. Plus, employers are required to kick in another 6.2%.
As a result, while the Social Security Administration may not be able to cover its past promises in the future, it’s certainly not bankrupt. And it’s definitely not going away. The ongoing Social Security tax will make sure of that.
Will the benefits be the same? Perhaps not. In fact, unless legislation is enacted to restore the system, only three-quarters of scheduled benefits could be paid each year once the trust fund is depleted.
As a result, if a retiree collects $1,000 a month in Social Security benefits, once the trust fund is emptied, that payment could decrease to $750 a month. But it would not go to zero.
Like the overspending old farmer, Social Security may soon be forced to “live off the land,” so to speak. Promises may have to be broken.
But remember. Congress can always raise the rent.