Should Young Investors Count on Social Security?
Almost everyone I talk to who’s in their 20s or 30s just assumes that Social Security won’t be around anymore by the time they reach retirement.
They’ve heard that it’s in trouble. They hear the politicians talking about a broken system. So they decide that they can’t count on it and they do their retirement planning without it.
And to be honest, I had the same attitude for a long time. I figured it was safer to assume that it wouldn’t be there and to count any Social Security benefits I did receive as a bonus.
But over the years I’ve learned that that isn’t a helpful assumption. Because the truth is that for all the doom and gloom, the Social Security system is in better shape than many people think.
And when you DO factor it into your retirement savings plan, you can make things a whole lot easier on yourself, potentially even freeing up thousands of dollars per year that can go towards things other than retirement.
In this post we’ll talk about why even young investors should be able to count on Social Security and how you can factor it into your retirement plan.
Social Security is flawed, but not completely broken
Social Security is definitely a flawed system with plenty of holes, and hopefully our politicians are at some point willing to do something to fix it. After all, we’re better off as a society for having it in place, and other countries like Australia have even bigger, and more stable, forced savings programs to take care of their citizens.
But the fact that it’s flawed doesn’t mean that it’s completely broken. And this is the part that often gets missed in all the reports of doom and gloom.
According to the 2016 annual report from Social Security’s Board of Trustees, the trust fund that’s set aside to pay Social Security benefits will be depleted by 2035. That’s the bad news.
The good news is that once that trust fund is depleted, there will still be enough tax money coming into the system to fund at least 74% of projected benefits through the year 2090, even if no changes are made to the program.
While this isn’t ideal, it does mean that you can expect to receive a significant portion of your estimated Social Security benefit, even if you’re decades away from retirement. Which is a whole lot better than not expecting to receive anything at all.
But aren’t there other risks?
So, according to our current laws, the math says that even people in their 20s and 30s should be able to count on receiving at least 74% of their Social Security benefit in retirement. That’s not too bad, but many people still won’t be convinced.
They’ll argue that there are other ways that Social Security could be scaled back, and they’re right. Some of the things that have been proposed in order to fix the Social Security system include:
- Increasing Social Security retirement age
- Decreasing Social Security benefits
- Increasing taxes on Social Security income
- Decreasing the cost-of-living adjustment
- Decreasing Social Security benefits for high-earners
Any of those things could happen and it’s impossible to know what about Social Security will change in the coming decades and what kind of an impact those changes will have.
There are good reasons to be worried, but that still doesn’t mean that you should completely ignore Social Security. After all, it’s still a popular program that would be difficult to eliminate from a purely political perspective. And none of those proposed changes would eliminate it anyways. They would all simply serve to decrease the benefit you would receive.
How to include Social Security benefits in your retirement plan
I don’t have a crystal ball, so I don’t know any more than anyone else about what will happen to Social Security over the next several decades. I can’t give you a precise answer in terms of how much you should actually expect to receive in Social Security income.
But when I do retirement planning for my clients I calculate their full estimated Social Security benefit and then I assume that they will receive 50% of it.
Why 50%? Well to be honest it’s not incredibly scientific. But I figure that it’s a reasonable middle ground between the 74% you would get if absolutely nothing changes, and the much lower percentage you might get if there were drastic cuts.
And the good news is that that 50% makes a BIG difference in the amount you have to save for retirement.
For example, when I run the numbers for myself and my wife, including 50% of our estimated Social Security benefit decreases our target retirement savings by $585 per month! That’s real money that we can put towards other things like daycare, traveling to see family, and going out for ice cream.
To put it another way, completely ignoring Social Security might cause you to save a lot more for retirement than you have to. In some cases that might be a good thing, since it could mean that you reach retirement even sooner. In other cases it might create unnecessary stress on your budget and prevent you from doing things you’d like to do.
For more on how to calculate your estimated Social Security benefit and how to factor it into your personal retirement plan, you can read this post: How Much Should You Be Saving for Retirement/Financial Independence?
Don’t sell yourself short
I completely understand all the reasons why you would be hesitant to count on Social Security. I felt the same way for a long time. There’s a lot of uncertainty around the program and it feels safer to just count it out.
But the truth is that Social Security is in much better shape than most people realize. And you can SIGNIFICANTLY reduce the amount you have to save for retirement by including even a conservative estimate of Social Security income.
So yes, in my opinion even young investors should count on Social Security. Not all of it, but enough to make a difference.
Nice to see a post that actually doesn’t bury Social Security. Many Americans, including some of my family members, will be depending on Social Security to be the cornerstone of their retirement income. While I wouldn’t do this myself, I think it shows that there is room for it in your plan and that politicians will not let the program die since it means they will probably not get re-elected!
I’m with you Syed. While it’s impossible to know how the political landscape will change over the coming decades, at least right now it seems like getting rid of Social Security altogether would be politically inviable. Changes and cuts seem likely, but assuming that some portion of your benefit will be there when you retire also seems reasonable.
Whacking projected SS benefits by 50% doubles the stated 25% reduction.
The problem I have is we, as financial professionals, are sending the message that SS benefits are ephemeral. Even in a worst case scenario, benefits are reduced 25%, end of story.
A lot of people with children fail to appreciate the safety net SS survivor benefits provide. SS survivor benefits augment and even outweigh life insurance.
I used to feel exactly like you but as old song goes, I was blind, but now I see.
You write well and best wishes,
Buz
Thanks for the input Buz. So maybe I’m misunderstanding the report, and if so I would love to be corrected, but my reading of it says that the reduction will be 25% if everything is left exactly as is. So my concern with relying on that as a worst-case scenario is that there could be changes made to the program that further reduce benefits for people in their 20s and 30s. That concern is what leads me to use 50% of the estimate as opposed to 74%.
By the way, I completely agree with you that people ignore the significant impact of Social Security survivor benefits. I include that in my life insurance needs calculations and it almost always significantly reduces the need for individual coverage.
The 25% +/- reduction is not a government decree or action, the trust fund will be exhausted then and future benefits will come from employment taxes.
There are too many variables to try and account for every possibility when planning sixty or more years in the future
For instance, a retirement projection for someone in their 20s or 30s could be affected a 1% change in projected investment returns. Retirement contribution levels change, unexpected expenses pop up.
If you want to scale back SS benefits, then cut the inflation rate for SS benefits. When we, as investment professionals, tell a client to expect drastically lower benefits we erode consumer confidence which is exactly what the financial services industry wants. Fear sells.
Buz
Gotcha. Thanks for the insights Buz. I know this is something you specialize in and I really appreciate your input, as well as your focus on helping consumers both feel confident and plan confidently.
This is something I (29 years old) discuss all the time with my father (72 years old). I take the doom and gloom approach; he’s the opposite. My plan: because, as you note, we really have no way of knowing what will happen (or how voters’ attitudes may or may not shift) over the next several decades, I’m not going to plan on receiving Social Security. If I do, great. But I want to be prepared if that ends up not being the case.
Thanks for chiming in Dave!
Social Security may be reduced but it’ll still be there. Since SS tax is deducted from every worker’s paycheck there will always be money in the fund…it might not be enough to pay full benefits though.
Exactly. That’s why the report projects having enough money to fund 74% of projected benefits through 2090, even after the trust fund runs out and even if no changes are made. There’s still money coming in to fund most of the need.
I was excited to read this because I had a post scheduled this week as well about Social Security in retirement planning and so it was on my mind already.
I’m using 75% in my calculation because I really think that the government will lean more heavily on increasing taxes than on cutting benefits. There are (very unfortunately) just too many elderly people that rely solely on Social Security just to get by. I don’t think that our generation will be more prepared than the current retired generation overall.
Great call out on what it means when our surplus runs out. It just means we don’t have a humongous pile of money we can draw on to make up for the fact that we’re paying more out than we’re taking in.
Hell, why won’t politicians just remove the income cap for Social Security? Why should income ABOVE a certain amount ($118k?) not be taxed? It’s the weirdest, regressive tax law I’ve ever heard of.
Anyway, I wanted to ask if you know of any good resources to calculate Social Security for very early retirees?
Good question. I’m not aware of any tools specifically for early retirees, but this tool does let you set your age at retirement and see your estimated benefits: https://www.ssa.gov/planners/retire/AnypiaApplet.html. So you could set your retirement age as, say, 40, and see what you could expect to collect starting at age 62.