Many of us have heard the myth: Social security is running out of money fast, and there’s a good chance it won’t be around when millennials retire — or even in 2035. Here, we’ll look at why that’s not the case, and why there’s at least some reason to be optimistic about the future of the Social Security program.

Understanding Social Security

Social Security – in the context of retirement planning – usually refers to the monthly benefits that seniors receive after they retire. When you apply for a pension, you get a monthly check for life that is adjusted for inflation. (On that note, retirees receiving benefits in 2023 can expect an 8.7% increase in benefitsthe largest increase since the early 1980s.)

In reality, the Social Security Administration, or SSA, administers two programs: the Old Age and Survivors Insurance program and the Disability Insurance (DI) program (collectively, the OASDI programs). When retirees say they’re collecting Social Security, they mean they’re receiving Old Age and Survivor Insurance benefits.

The DI program, on the other hand, serves people with disabilities and their families; this pool of money is completely separate from the one that serves retirees. Note that you cannot collect from both programs at the same time.

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Concerns around social security

Both welfare programs require inflows to cover expected costs. The inflows come in the form of a payroll tax levied on workers’ wages at a rate of 6.2% of earnings up to a maximum of $147,000 in 2022 ($160,200 in 2023).

Unfortunately, the cost of the Old Age and Survivor Insurance (OASI) program may exceed the total inflow in 2022. That means the program will need to dip into trust fund reserves to meet current aid applications. If the program continues to draw from its reserves to meet projected benefit needs (which are exacerbated by rising costs and an avalanche of new retirees), the OASI trust fund will run out in 2034.

If this happens, the OASI program will be able to pay 77% of projected payments based on expected annual inflows alone. Fortunately, the DI Trust’s reserves are not expected to run out until the end of the century, providing some comfort to families affected by health conditions.

However, there is certainly some concern that the OASI program will not be able to meet the needs of ambitious retirees. The question is not so much whether social insurance will exist at all, but the solvency of the administration full claim receipt benefits. Perhaps even more troubling is that the longer Congress waits to act to close the gap, the more decisive action will be needed to close the gap downward.

Some reasons for optimism

Again, the OASI program is not dying out, but it is running out of trust fund supplies compared to the continued (and growing) value of the program. That means there will be at least some benefit, even if – in a sub-optimal scenario – the benefits are only 77% of what they should be.

Second, the DI Trust is sound, meaning that disabled workers will be able to rely on Social Security Disability benefits to cover their basic spending needs.

Finally, it’s no secret that Social Security faces long-term solvency problems with paying out 100% benefits for the next century. It’s at the forefront of legislative discussion, and there’s at least some chance we’ll see an increase in the payroll tax to ensure the future of the program. In other words, it’s not an item that’s going away anytime soon.

Do not deduct Social Security

The probability of complete abolition of Social Security is quite low. A much more likely scenario would be that retirees would see their benefits cut starting in 2035. But there’s no way to know for sure until we see some legislative action around the program.

For financial planning For these purposes, you might consider a Social Security income projection of three-quarters of the estimated numbers to be very conservative. This will help you plan for the worst, while you can still hope for the best outcome in Washington to ensure full benefits throughout your retirement.

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