Social Security Will Be There For You When You Retire

Filed in Money by on March 20, 2014 0 Comments

social securityPeople worry a lot about Social Security collapsing before they retire, and understandably so. The system is rapidly running out of money and Washington seems to have no collective will to pass reforms to shore it up. It’s a mess, or, as they say in Texas, if not, it’ll do until the real mess gets here.

So why do I think you will collect Social Security benefits when you retire? One argument is that the Social Security program will persist because it is the so-called “third rail of politics.” This uses the analogy of the third rail of an electric train track, which is electrified and deadly if touched. The theory goes that Social Security is such a popular program that any politician who voted to cut it back severely or not save it would be “dead” in the next election. I think there is a lot of truth to this, but I would not be comfortable relying solely on this argument as assurance that Social Security will be there for me when I retire. Who knows what those knuckleheads in Washington might do?

No, I am inclined to instead rely on basic economics. It is true that the Social Security trust fund, at its current rate of decline and assuming no reforms, is expected to run out of money by around 2033. Some take this to mean that the system will be “bankrupt” and cease to exist. What they fail to take into account is that the system will still be collecting Social Security taxes from current employees. In fact, it will collect enough tax revenue each year to fund 75% of its obligations to current retirees, at least through 2087! That means that even with no money left from what you or anyone else contributed to the system, current contributions would still fund 75% of promised payments. The system can remain solvent and be able to meet the majority of its obligations on this “pay as you go basis.”

Of course, this is not how Social Security was initially designed, nor is it the ideal scenario. It was designed to collect money from you, save and invest it, and then use that money to pay your benefits at retirement. The “pay as you go basis” falters if there are not enough current workers to fund current retirees, although that would be unlikely as long as the population and economy continue to grow.

Being overly cautious about the future of the Social Security program can cost you. I have spoken to near-retirees who say they plan to begin collecting Social Security at the earliest possible eligibility age of 62 because they want to get as much money as possible from the program “before it collapses.” They don’t want to get “cheated.” Unfortunately, many of these people will end up cheating themselves because they could collect much more money from the government if they showed more patience. If they waited until “full retirement age,” which is 65 – 67 depending on their year of birth, they would collect approximately 33% more per month in Social Security payments. By waiting until age 70, they could increase their monthly benefits by as much as another 32%. For people who have longevity in their family and reasonably good health, these higher monthly benefits could result in them collecting significantly more money from Social Security over their lifetimes. It would be a shame to not get this money from the government, in perfectly legal and moral fashion, just due to a misguidedly pessimistic view of the future of the Social Security program.

Wealthy People: Beware “Means Testing”

Of all of the reform proposals that have been bandied about in Washington, the one that could have the most significant negative impact on certain people’s future benefits is called “means testing.” Means testing would reduce Social Security benefits to people who have high levels of income or wealth. Many wealthy people don’t like this concept because they argue that they contributed a lot of money to the system and should get their money back when they retire. Unfortunately for them, reducing benefits for the rich might be one of the reforms that ends up being the most politically expedient.

In conclusion, it is not unreasonable to assume that you will collect 100% of your currently promised Social Security benefits through 2033, and 75% through 2087, unless you are wealthy. (But don’t come after me if you don’t!) For those of you who are wealthy, means testing could significantly further reduce your benefits at retirement. In that case, I recommend you just be glad you already have so much money, and don’t complain too much. Things could be worse!

About the Author ()

TIM MCINTYRE retired in 2004 from his position as president of Applied Systems after facilitating a successful sale of the company. At only forty-six years old, he made the unusual decision to fully retire to pursue other interests and simply enjoy free time. As a hard-driving Type A personality, this turned out to be a significant challenge for the Notre Dame and University of Chicago-educated MBA, CPA, and Certified Cash Manager.

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