Social Security is the comprehensive federal benefits program designed to provide guaranteed income for retirees and their spouses. Among the most well-known (and popular) government programs, most people know how Social Security works. In fact, we covered the basics in a previous blog post. But for now, let’s focus on a Social Security-related topic that gets a great deal of attention—the belief that Social Security will run out of money in the near future and, therefore will compromise the financial well-being of millions of retirees. Is this true? No, not really, but let’s dig deeper.
Social Security benefits currently being received by retirees in 2021 are being funded by working Americans who pay a portion of their incomes into Social Security. A 35-year-old is paying for the benefits of a75-year-old. The current 75-year-old, when they were 35, was paying for a retiree decades ago. Fairly simple, right? Well, not so fast. Because of the so-called “baby boom” in the decade after World War II ended—1945—there was a massive increase in Americans being born. That generation of babies are now adults and receiving or are about to begin receiving Social Security benefits. So, what’s the problem? Well, it’s probably obvious. Since that “baby boom” in the 1940’s and 1950’s, Americans had fewer children over the subsequent decades. In other words, there are currently far fewer workers paying into Social Security than usual and there are currently far more retirees receiving Social Security benefits than usual. The math simply does not add up.
So, doesn’t that mean Social Security will run out of money? Well, no. Workers are still putting money into the program. That will not stop. But is there enough money to pay for 100% of every retiree’s expected benefit? As of 2021, yes. As of 2033, probably not. But even the worst-case scenario predicts that retirees will receive 80% of what they are entitled to. Good news? Not really. But “running out of money”? Absolutely not.
And here’s the good news: Social Security is extremely popular, and the solutions to this underfunding problem are fairly simple, including increasing payroll taxes on working Americans to ensure full benefits are paid to retirees. Given the popularity and importance of Social Security, it would be unlikely that Congress would fail to solve this problem. We’ll be sure to keep an eye on this issue in the years to come.
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