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Don’t Buy Into the Social-Security-Is-Going-Bankrupt Myth

by Kevin Mercadante

The Social-Security-is-going-bankrupt claim is one that we are hearing often these days. There’s a grain of truth to it – which will delve into in a bit – but most of it is sensationalist drivel. There is no question that it makes for great attention grabbing headlines, and probably plays well into the hands of the retirement planning industry.

But a lot of people are worrying needlessly about this potential outcome. What are the myths – what are the facts? And more important, how can we prepare for whatever will come about?

The popular assumptions

Social Security is Bankrupt Myth

Is Social Security Going Bankrupt?

At the extreme, a Social Security nuclear nightmare is set to unfold at an unknown point in the future. The checks will stop going out each month, then the White House, Congress, and the Social Security Administration will be forced to finally come out and publicly admit that the system is bankrupt.

The elderly will be kicked out of their homes to live on the streets, or – if they’re lucky – with their children. They’ll be wearing 30 year old, threadbare clothing, and dinner will be a can of pet food.

That scenario is the product of a mix of political gamesmanship and media sensationalism. And it works extremely well for all the players in the game. For example, in order for a politician to claim that he is “working tirelessly to save Social Security for our beloved elderly Americans”, he first needs to establish the fact that someone else is looking to take it away. It gets votes, and it gets people reading articles and watching TV programs. Mission accomplished!

If you are buying into this, you’re most likely wasting energy and valuable time.

Why that’s not likely to happen

A big part of the reason why Social-Security-is-going-bankrupt is so popular is the fact that so many people rely upon it so heavily. America’s senior citizens count on Social Security to provide 39% of their total income, and the majority of retirees rely on it to provide more than half their income. Talk of the system becoming history creates powerful negative emotions.

But that dependence on the system is also precisely why it can’t go away. Not only do so many people count on Social Security now, but most of us hope and expect to have it in the future. That represents a political force that will make “bankruptcy” extremely unlikely.

Another important fact is that Social Security is an integral part of the US economic and financial systems. It is in fact one of the foundational systems in the country. The end of Social Security would not just imperil retirees, but would also hurt millions of businesses that would suddenly lose tens of millions of customers who would then be too poor to buy their products and services. And that’s not to mention the banks, would would no longer have reason to expect repayment on loans made to anyone over the age of 62.

But beyond political and economic considerations, the US government has too many options to allowing Social Security to go bankrupt. Just as it is doing now, the government can either raise taxes, or borrow or print the money needed to keep Social Security solvent. The bankruptcy of Social Security is impossible absent the complete collapse of the US government.

Just based on history, that’s not impossible either, but it’s far less likely.

A more likely outcome

Taking the nightmare scenario off the table, there is no question that Social Security has its problems. There are now too many people collecting benefits relative to workers paying taxes into the system. That will have to be addressed in some fashion going forward.

Three scenarios that we should fully expect to come about are:

  1. An increase in the retirement age,
  2. A reduction in benefits, or
  3. Some combination of both.

We’re actually already seeing the implementation of an increase in the full retirement age from 65 to 67 for people born after World War II. It is entirely possible that the age will be increased further, even up to age 70. And it is not unlikely that early retirement – currently age 62 – will also be increased.

Reduction in benefits can come about simply by the Social Security Administration adjusting its benefit calculation. Since the calculation is only loosely available to the public, gradual adjustments would be fairly easy to accomplish. Most likely, we’ll see a combination of an increase in the retirement age, as well as reductions in benefits.

That combination – and not the complete bankruptcy of Social Security – is the scenario that we should all be preparing for.

How to prepare for reduced Social Security benefits

Just being aware that Social Security is likely to be less generous by the time we retire should be a sufficient wake-up call for us to make other plans. We can continue to plan to have Social Security as one source of income in retirement, but it is unquestionable that we need to be prepared to rely upon it far less than current retirees do.

How can we begin preparing for that now?

Live on less, save more. This is Personal Finance 101 – live on less, save more, and invest the difference. It’s the single best strategy for preparing for retirement matter what happens with Social Security. By living beneath your means, you not only prepare yourself for a more frugal retirement, but you also enable yourself to save more money for that retirement.

Delay collecting Social Security benefits. With regard to Social Security itself, you can increase your monthly benefit by up to 8% each year that you delay retirement. If your normal retirement age is 67, and you delay collecting benefits until age 70, you can increase your monthly benefit by as much as 24%.

Maximize your retirement contributions. The single most important preparation for lower Social Security benefits is increasing the size of your retirement portfolio. There are different ways that you can do this. Most people are completely unaware that you can contribute as much as $51,000 per year to various retirement plans. Among the options are maximizing your 401(k) contributions at work, opening an IRA or Roth IRA, or even starting a side business with its own dedicated retirement plan.

Get out of debt. You should plan to enter retirement in a debt-free position. By paying off debts, you also eliminate monthly payments, and that lowers your cost of living.

What are your thoughts on the bankruptcy of Social Security? What preparations should we be making now?


Published or updated October 28, 2013.
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{ 14 comments… read them below or add one }

1 Kurt

I tend to agree–SS is certainly not going away or bankrupt, barring, as you say, a major catastrophe. The way I like to think about SS is in the context of financing non-essentials in retirement. Save enough outside of SS to pay for rent, food, gas, utilities, etc. through a long retirement. Then whatever SS you end up getting can be used to enhance your lifestyle above the basics, if desired.

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2 Ryan Guina

Great comment, Kurt. I’m in my young 30′s so I imagine there will be many changes to Social Security by the time I reach retirement age. In addition to Kevin’s observations, I think we will have some form of means testing at some point for Social Security recipients. It could be in the form of income in any given year, or by net worth, or some combination. Getting rid of Social Security would be unpopular and problematic for the reasons Kevin stated. But limiting who is eligible for Social Security would be easier to push through, at least from a political standpoint.

At this point, my plan is to prepare for retirement as though Social Security won’t be there, or as though it would be limited for me. That way I will have my family’s needs covered. If I receive Social Security benefits, then that would just be a bonus for me. At this point, I think that is the prudent way to plan.

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3 Kostas @ Finance Zone

These are good solid tips and tips that anyone should follow, not just because of Social Security. Getting out of debt and saving more can benefit everyone. Estimate potential future living costs, and start saving now.

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4 dojo

I really don’t think it’s a myth. Your economy is not doing well. You have a lot of debt (as a country), you have already gone through a pretty nasty recession and now a ‘block’ in Washington. This is not something that should leave you optimistic. Don’t worry, many other countries are in the same crappy situation, mine included.

In my country the social security system is already bankrupt (or very close to). We have millions of people who are being supported by the State (old people, kids, disabled). We also have a lot of lazy bums who’d rather stay on welfare than work. I’m sure your country has this issue too. We’re not only supporting the people who are really in need, but also cohorts of people who know how to ‘game’ the system.

There are people who still work or try to run a business, who are being charged more each day for the ‘luxury’ of having a job or a business. Bigger taxes is all I can hear about. Feeding all the people who need social support, the ever-growing Governments and all the other crap we’re paying for means less money remains in our pockets. Don’t know about your country, but more and more taxpayers are looking for ways to keep more of their money and stop supporting all this ‘machinery’.

I don’t expect to receive ANYTHING from my State (not that I ever did or needed), so I’m saving for my retirement and for my family. Most our economies are already doing worse by the day and unless something miraculous happens, in few years we’ll be in even deeper trouble.

So I do think that Social Security (what’s left of it anyway) will either go down entirely or worse anyway. Don’t expect anyone to care for u, make sure you are prepared. And, if I’m not right and we’ll have some amazing years from now on, more money never hurt anyone :D

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5 Kevin Mercadante

Hi Kurt – My feeling has always been if Social Security goes away it will mean other systems are in distress as well, as part of a general government breakdown. For example, if Social Security goes “bankrupt”, it will probably mean that 401(k) plans and other tax sheltered vehicles are gone too. The whole system will be reordered. I don’t expect that to happen.

We should plan on some sort of Social Security income, but as Ryan points out, it may be more of a supplement than anything else. I can definately see that happening and that’s the scenario we should plan for.

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6 Kevin Mercadante

Hi Kostas – Agreed, I think that solid financial principles and plans are the answer no matter what the question is or what the potential crisis might be. One of the issues with Social Security has been that too many people rely on it too heavily. That means that a lot of people are probably not making very solid financial plans. But that’s a problem anytime you have a comprehensive centralized system. People assume that the system will take care of them and they don’t have to do anything more.

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7 Kevin Mercadante

Hi Dojo – I don’t discount what you’re saying at all. My assumptions rely on the system remaining intact, which I agree may prove to be wrong. Most governments around the world are over-exended with no political/public will or desire to bring about substantive reform that will ensure long term stability. As it is, I’m astonished at the ability of governments to keep the system afloat longer, and find it increasingly difficult to see to when they won’t be able to.

But if the system does collapse then retirement savings will prove equally useless (currency collapse, debt implosions, asset price collapses, etc). That’s a possibility, but it’s outside the discussion of retirement planning. You’d need to grow your own food, save with gold and silver, and be ready to barter for what you need. No one will be able to retire in that environment. Maybe I’ll tackle that in a different post ;-)

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8 Dan

So in order to preserve Social Security we need to raise taxes, borrow money, print money, reduce benefits, or some combination. (All of these are lousy options with negative consequences.) If we don’t, SS will collapse. In other words, Social Security, in its current state, will eventually be bankrupt.

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9 Bryce @ Save and Conquer

The only way Social Security would expire is if the US government collapses. I don’t see that happening within our lifetimes. Most likely is that benefits will be cut to match, more or less, what is coming in. That would mean people in the future will only get around 3/4 of what SS currently pays out. Means testing will also likely be implemented, so if you have a large nest egg, you won’t get as much from SS as someone with no savings. Finally, the cap on SS wages will go away. All income will be taxed by SS, no matter how much you earn.

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10 Kevin Mercadante

Hi Bryce – That last one, removing the ceiling on SS wages for tax purposes seems very likely. They’ve already done it with Medicare, so it isn’t at all far fetched. Then the upper income brackets will pay well over 50% in income taxes with all taxes combined.

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11 Kevin Mercadante

Not if they do everything you’ve layed out Dan. At least not for a very long time.

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12 Dan

Kevin – that’s exactly my point. The only way to keep SS from going bankrupt is to raise taxes, add to our $17 trillion of debt, cause inflation, and/or reduce benefits.

Even though it’s depended on by so many, it’s a fundamentally flawed system: The money taken out of your paycheck doesn’t go towards SS liabilities – it goes to the general U.S. Treasury (thus enabling further federal spending – but that’s another topic). Thus we have our situation today where we have unfunded SS obligations. The only way the system can sustain itself is with external measures that hurt the economy.

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13 Kevin Mercadante

Hi Dan – That’s true, it’s a fundamentally flawed system and all of those measures will be carried out to one degree or another to “save the system”. But my point is that one way or another the system will continue. It will continually degrade over time, but it won’t go POOF the way some think it will. If it does, we’ll have much bigger problems and retirement won’t even be possible.

And for what it’s worth, I think we all need to have at least contingency plans for that outcome. But again, that’s a different discussion.

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14 Mario, Debt BLAG

Most of the time, I just tell people that no, it’s not; you’re confusing Social Security with Medicare.

If they pursue it, I move along to mention that even the most reactionary projections show that there we’re decades away from it no longer being revenue-neutral, and if it no longer is, then, because it’s mandatory spending, it will get paid unless Congress votes to change the underlying legislation. If you think Congress is that active and that brave.

Finally, it’s always struck me as odd that, of all the things the government spends money on, we expect just Social Security to be revenue-neutral. Would we ever expect the Army to go out and collect more than we spend on it?

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