You Can Still Count on Social Security
Naysayers be damned, I think you can still count on social security in your retirement. If that seems crazy, read on to get my take which is, by definition, over-analyzed.
What is Social Security?
President Franklin Delano Roosevelt created the Social Security administration in 1935. He thought of the program less as a specific response to the great depression and more as a way to provide long-term financial security for those unable to provide for themselves.
Today, it’s fashionable among young people, and especially among the financially savvy, to assume that Social Security simply won’t exist when millennials and Gen-Z workers reach retirement age. In 2023, social security definitely seems headed for trouble. If you are below the age of 40, I think it is a very good idea to assume that you will not receive the same level of benefits as your parents or grandparents. But I also don’t think it’s realistic to assume that social security will simply cease to exist anytime in the foreseeable future. In short, I think you can count on Social Security despite some dark clouds on the horizon.
So, if you are creating retirement scenarios for yourself or your family, I think you should include social security payouts, but just at a reduced amount or with a later payout date.
A Brief History of Social Security
Social security as we know it didn’t spring to life fully-formed in 1935. The 37-page Social Security Act that was signed on August 14th, 1935 by FDR included 4 separate types of insurance. There was Aid to Dependent Children, Old Age Insurance (OAI), and Old Age Assistant (OAA). [source] The old age insurance program (OAI) eventually became the Old Age Survivors and Disability Insurance program (OASDI) which is what most people in the US today refer to as “social security.” [source]
The legislation was created in 1935, but it took 5 years for the program to actually distribute its first monthly benefit check. Ida May Fuller, a Vermont school teacher and secretary, received the first monthly social security check in the amount of $22.54 in 1940. [source]
Since then, the social security program has undergone relatively small tweaks:
- 1961 – early retirement age lowered to 62
- 1975 – automatic Cost of Living Adjustments (COLA) implemented
- 1984 – elements of the disability program modified by Congress
- 1996 – drug addiction and alcoholism become ineligible for disability payments
- 2009 – prisoners excluded from receiving payments
There have been other tweaks, but in broad strokes, the system has remained relatively static.
Counting on Social Security: how Insolvent is It?
Your payroll tax deductions fund the social security program. If you’ve ever seen your tax return and wondered what the “FICA” line item was for, now you know. The Federal Insurance Contributions Act (FICA) funds the social security and medicare programs. The Social Security Administration holds funds in trust for recipients until they reach retirement age. This worked well when the US population was relatively young and growing. But now, the US is rapidly aging:
The trend towards an older population is bad for social security. The ratio of working to non-working adults is increasing. This is called the dependency ratio. For the past 40-odd years, the dependency ratio in the US has been relatively low and stable:
But as the baby boomers retire en-masse, the dependency ratio is expected to reach unprecedented levels. For a program funded on income taxes, this is particularly bad news. As people retire, they cease to have taxable income. This will push policymakers to squeeze those still working harder by increasing FICA taxes. Increasing taxes will push some people at the margin to drop out of the workforce, making the situation still worse.
According to a Social Security Trustees Report from 2022, the program may be incapable of paying full benefits as early as 2034. That’s decades before millennials or Gen-Z workers could expect to receive any benefits.
Counting on Social Security: The Case for Optimism
Okay, so there are definitely some dark clouds on the horizon for the social security system. No question about it: something will have to change if young and middle-aged workers today are to receive anything in their retirement. But I think there are X big reasons to believe that things will change: bipartisan political support, cultural ubiquity, and a tractable set of solutions.
We live in politically divided times, but Americans almost universally support social security. According to AARP, 93% of Republicans, 99% of Democrats, and 92% of independents see Social Security as an important government program. [source] In April of 2023, PBS found that 79% of Americans polled said that they were against reducing the size of Social Security benefits, and 67% are against raising monthly premiums for Medicare. [source] Similar bi-partisan support has shown up in polls from other news outlets: National Academy of Social Insurance, Gallup, and Yahoo News to name a few.
Many pundits and politicians refer to Social security and medicare as the “third rail of US politics.” Those train engineers in the audience know what this is about, but for the rest of us, this is a reference electrified train tracks. Electric trains have two rails on which the cars ride. There is a third rail in the middle that powers the cars. If you touch the third rail, you get electrocuted and die.
Even the Far Right Probably Can’t Touch Social Security
Few politicians are willing to propose doing away with, or even reducing the payouts from the programs. Even former president Trump has advised republicans not to touch social security or medicaid for fear of public backlash. [source]
Despite saber-rattling from more extreme members of the American right, a whopping 97% of older Americans either receive social security payments today or will receive them in the future. [source] Older Americans tend to be more conservative [source] which means that a large number of republican voters are literally living week to week on the proceeds of the social security program.
As they say, money talks and shit walks. Social security is incredibly important to the financial stability of older Americans. Attempts to eliminate or reduce benefits will be deeply unpopular, even in staunchly conservative parts of the nation. Democrats are even more bought into supporting social assistant programs. So it seems like social security will benefit from that rarest of things: agreement among most US politicians.
Social security and medicare are incredibly important to the financial independence of elderly Americans. Let’s consider some data points to put this in perspective:
- 40% of older Americans rely only on social security for income in retirement. [source]
- Only ~4% of Americans aged 62-84 in 2010 were projected to never receive social security benefits. [source]
- ~50% of all American families have no retirement savings at all. [source]
- According to the Bureau of Labor Statistics, the workforce participation rate among people aged 75 was 4.7% in 1996. By 2020, it had risen to 8.9%. The BLS expects it to hit 11.7% by 2030. [source]
- The Center for Budget and Policy Priorities estimates that if Social Security payments were halted, the poverty rate for Americans over the age of 65 would jump from 9.1% to 44.4%. [source]
What I hope this data proves is that social security benefits are central to the cultural fabric of America today. Without them, a broad swath of people would be immediately and unceremoniously impoverished. The second order effects are even harder to predict. For instance, would senior citizens turn to criminal activity to keep themselves alive? Would the housing market survive a mass exodus of older owners selling their homes to reduce their costs? Would pharmaceutical companies implode after an enormous downturn in demand?
Nobody knows the answers to these (and many more questions). The point of this section isn’t to accurately predict what would happen if social security ended tomorrow. The point is that regardless of the particulars, it would be a massive shock to our society and way of life.
Social Security’s popularity is strongly bi-partisan. But lawmakers Unlike individual support for the social security program, the path to fixing it will be deeply affected by political polarization. Republicans must at least pretend to be cutting government “handouts” while Democrats want to outright raise taxes. But there are a lot of ways to patch the leaky ship that is social security:
- Gradually raise the qualifying retirement age.
- Increase the social security payroll tax cap.
- Reduce benefits for high earners.
- Increase the FICA payroll tax.
- Change the cost of living (COLA) adjustment calculations.
- Increase benefits paid to people over the age of 80.
These are just a tiny sample of the possible fixes that could be made to avoid benefit reductions. And some of them enjoy wide support across Democratic and Republican parties.
None of these changes on their own will fix social security. But put them together, and the odds seem good that a solution can be found.
Counting on Social Security: How to Model Your Retirement
I think social security can be fixed. But I think it’s unlikely to be fixed in such a way that young and middle-aged workers will receive all the benefits offered to retirees today. Older people today have benefited from tremendous economic advantages. From home prices, to education, to medical care, Baby Boomers and some members of Gen X have been able to live more easily than young people today can reasonably expect.
So, how should you think about modeling social security payments in your retirement plans? I like to think in terms of adjustments to existing benefits.
Discounting a $100k Salary Benefit
Let’s take as a baseline that your income is ~$100,000 and you are ~35 years old. Your expected social security benefit will be ~$3,000 per month. If you are curious to get a more detailed estimate, check out the social security quick calculator.
Given that I think it’s unlikely that young and middle-aged workers today will receive benefits at the current level, you can then discount this monthly benefit. Here’s how I think about the range of possibilities:
Using this (very) rough guide, you can adjust your financial retirement model of choice to incorporate the very real probability that social security will exist when you are old. I personally think that this sort of SWAG (scientific wild ass guess) is significantly better than either trusting in the status quo or assuming Social Security doesn’t exist at all. If you are familiar with betting, this makes sense: very few things in the world have future probabilities of either exactly 0% or 100%.
I think it’s also worth noting that if you want to be rich, social security payments will be rounding error in your calculations. If you want to be rich and retire early, that’s doubly true.
As I’ve outlined above, social security is on track to be insolvent based upon current tax revenue and benefit payments. But that doesn’t mean that it won’t exist at all in 20, 30, or 40 years. Social security is such an important part of American society that I think it’s unrealistic to write it off completely. By the same token, I think it’s unrealistic to assume that young and middle-aged workers today will get the same good deal that older Americans have enjoyed for the last couple of decades.
This leads to a helpful middle ground: you should expect to get some help in retirement from Social Security. Given that those payments are typically pretty meaningful ($3k/mo is nothing to scoff at, even for wealthy Americans), this should give you hope! Unlike what the doomer personal finance blogosphere would have you believe, social security isn’t in fact dead. Given the level of financial insecurity that many millennials are already experiencing, there’s even a remote possibility that social security gets expanded in the direction of a universal basic income in the next couple of decades.
I’m not going to hold my breath for a universal basic income, but I do include social security into my long-term financial plans, and I think you should too.
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