In response to the devastating and crippling effects of the Great Depression, the United States government promised to help its residents avoid poverty in old age. To this end, Congress passed the Social Security Act of 1935, and it was signed into law by President Franklin Delano Roosevelt in August of that year.
The original act also covered unemployment benefits, prompting President Roosevelt to describe it as a law that would, ...give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age. Taxes and one-time lump sum payments were first collected starting in January 1937. Shortly after that in 1940, the first monthly retirement payments began going out.
Since this time, Americans have counted on the promise of Social Security to provide them with income during their retirement years. But, could that change in the near future?
Rumors that Social Security may disappear have abounded in recent years. Many workers don’t expect to have Social Security income when they retire. The most recent Gallup poll numbers show that 19 percent of workers don’t expect to have Social Security when they retire. And about half of Millennials don’t think they’ll get benefits from Social Security when they retire.
But is it really true? Let's find out.
Is Social Security Really Going Bankrupt?
After years of the federal government borrowing money from the trust funds and leaving a stack of IOUs behind, the Social Security reserve funds are being depleted quickly. While the news about the program is concerning, the panicked cries about the complete disappearance of Social Security are unfounded. Though the trust fund reserves will run out in 2035, the Social Security program will still be around. It just might look slightly different than it does now.
According to the trustees’ report, Social Security (both the disability and old-age and survivors insurance trusts) will still be able to pay about 75% of their currently scheduled obligations, even after the trust fund reserves are emptied. The trustees believe that the program will be able to meet this percentage throughout the seventy-five-year projection period. So, no. Social Security isn’t going to vanish completely.
But, the question is this: Which 75% of payments is Social Security going to make? Unfortunately, no one really knows the answer.
It's Best to Be Prepared
When it comes to calculating your retirement number, you are probably safe to count on at least some Social Security payout. But you may not want to count on 100 percent of what the SSA calculator says you’ll get, especially if you have a ways to go before retirement.
But when you're planning, the goal should always be to save more than enough, just in case the unexpected happens -- which it probably will somewhere along the way. So don't write off Social Security entirely. But take these steps to better prepare for retirement, regardless of the SSA's situation.
How to Prepare for a Social Security Shortfall
Many American workers used to count on pension plans. They're not being offered to most young workers these days, though. And even older workers are suffering because of pension fund mismanagement. This means you're more and more on your own when it comes to saving for retirement.
That's the bad news. But the good news is that this strategy put you firmly in control of where you put your savings and how much you save. Take these steps to prepare for a possible Social Security shortfall.
Step 1:Start with your employer's plan
Even though pensions are a thing of the past, most employers still offer their employees some sort of retirement plan. The most common is a 401(k). But non-profits may offer a plan called a 403(b), which is similar. These aren't the only options for employers, but they're far and away the most common.
With a 401(k), you can invest pre-tax money into the account, up to a certain annual limit. You can even have your employer put in the money before you get your paycheck. You can’t spend what you never see!
The money grows tax-free. And you don't pay income taxes on it until you withdraw it. You just have to wait until you reach the right age to withdraw penalty-free.
Oftentimes, employer-sponsored plans will come with an employer match. Sometimes this is a percentage match, which means your employer will match a certain percentage of your contributions up to a certain dollar amount. Sometimes it’s a dollar-for-dollar match until you reach the limit. Other times they’ll just automatically add a certain percentage of your salary to the account, whether you contribute or not.
Regardless, if your employer offers any sort of retirement plan contributions into your account, do what you must to get it. That’s basically free money!
Step 2: Consider Individual Retirement Accounts
Individual Retirement Accounts (IRAs) are a good way to save if you don't have an employer-sponsored plan. Or you can use an IRA to supplement the money you're saving in your employer's plan if you max out those contributions.
There are two types of IRAs, which vary depending on how they're taxed. A traditional IRA works like a typical 401(k). The money you save isn't taxed on the front end, but is taxed when you withdraw it. In a Roth IRA, on the other hand, you contribute post-tax money, but the money isn't taxed when you withdraw it.
Choosing between the two can be tricky. Read up on this decision here.
Anybody can open up a Traditional IRA account, but investors must meet certain requirements to open a Roth. Either way, IRAs are great because you can use them in addition to your employer-sponsored plan.
You can even use both a Traditional and a Roth IRA, provided that you don’t exceed the maximum contribution limits. In 2017, your total combined IRA contributions are capped at $5,500. If you’re 50 or older, the IRS allows you to make up to $6,500 in IRA contributions.
One more item of note: if you’re self-employed, you can access even better investing options that allow you to save more. Check out more on these options here.
Step 3: Consider Investing in Real Estate
If you’re hoping for additional income streams in retirement, you may want to consider investing in rental properties. In addition to gaining equity in your property, you’ll also reap the benefit of additional income through monthly rent payments.
With that being said, it’s important to remember that being a landlord isn’t for everybody. You’ll have to deal with renters and set a budget for repairs. And in the worst-case scenario, you’ll have to deal with personal drama, the mistreatment of your property, and possibly even the eviction of a tenant. But if you can handle it, the money you’ll earn can lessen your need to rely on your other retirement investments.
Step 4: Count on Some Social Security
Don’t forget about Social Security! Remember, it isn’t going to disappear completely. The SSA’s report says that after 2035, when the program’s ability to pay out will decrease, things should remain stable.
You’re paying into the Social Security system, and you will most likely still be able to get at least some of what you’re owed under the current calculations. In 2017, the average Social Security benefit at the age of 62 is about $1,076 per month. Your benefit could be higher, depending on how much you’ve paid into the system and how long you wait before drawing on Social Security.
The bottom line is that even Millennials will likely get paid at least part of their Social Security checks. If you want to be cautious, use this benefits calculator to see how much you're like to qualify for. Then, count on receiving 75 percent of that, or even 50 percent if you want a very cautious estimate.
The Bottom Line
Although Social Security isn’t as secure as it once was, it won’t likely disappear anytime soon, either. No matter what, you should be able to count on at least some payments for the foreseeable future. But your best bet is still to devise a retirement plan that includes include other sources of income. And the sooner you start saving in a retirement plan, the more money you’ll ultimately have.