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
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:
- An increase in the retirement age,
- A reduction in benefits, or
- 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?