Will Social Security Be Around When I Retire?

According to the Social Security Administration, Social Security retirement benefits will be payable in full through some point in 2033, but what if you’re planning to retire after that? News reports that Social Security won’t be around when you retire may have you worried, but we’re here to tell you that the situation may not be as bad as you think.

Let’s look at the facts around Social Security’s future and how they can impact your retirement planning.

Is Social Security going away?

Today’s Social Security benefits are paid mostly through annual taxes. Unless you’re self-employed, you split the Federal Insurance Contributions Act (FICA) tax, a dedicated payroll tax, with your employer. As you work and pay FICA taxes, you earn credits for Social Security benefits. But the benefits the program currently pays exceed the tax revenue allocated for Social Security. Because of that, the program has been spending down its trust fund. When the trust fund is depleted, tax revenue coming in through the FICA taxes will allow Social Security to continue paying out a percentage of benefits but not the full benefit.

When will Social Security run out?

The Social Security Administration projects that trust fund reserves will be depleted in 2033. At that point, taxpayer contributions are expected to cover 77 percent of scheduled benefits. And that’s if Congress does nothing to fix the problem. There are a number of potential solutions, including increasing taxes (on everyone or only on high-income workers) that fund the program, changing eligibility for benefits (like raising the full retirement age), lowering the benefit amount or a mix of solutions. Bills to address the issue have been introduced, but none have yet passed.

So, while many news stories are sounding the alarm, it’s premature to panic about what will happen when Social Security runs out. While most experts predict that your benefit amount may be lower, it’s likely you will still receive some money. And depending on when you want to retire, having this information now gives you time to adjust your plan, which could help minimize the impact on your retirement income.

What happens to the money I pay into Social Security?

You have to pay into Social Security while you work in order to be eligible to receive Social Security retirement benefits later on. But the money you pay into the system is not the same money you’ll draw from in retirement. Instead, your current contributions help fund payments to current beneficiaries. When you retire, your benefits will come from taxes paid by people who are still working, as well as any reserves in the Social Security trust fund.

Why is Social Security running out?

The major problem is demographics. As older generations—specifically baby boomers—hit retirement age, more people are accessing the benefit at once, and there aren't enough people in younger generations to replenish the trust fund. In other words, there isn’t enough money coming into Social Security to cover current and projected benefits. Things like inflation and interest rates can also affect the trust fund balance, though in a much smaller way than demographic shifts.

What will happen when Social Security runs out?

Again, Social Security will not completely run out. But if you retire at a time when there are no reserves in the trust fund, here are some projections of what may happen:

• The Social Security Administration projects that continuing income will provide for 77 percent of scheduled retirement benefits when the “Old Age and Survivor’s Income” trust fund is depleted. If no changes to FICA taxes are legislated, the percentage of scheduled benefits cover will gradually drop, hitting 71 percent by 2097.
• Considering this, one way you can plan for retirement is by budgeting to receive between 71 and 77 percent of scheduled benefits after 2033.
• Keep in mind that things could change. Projections shift year to year, and Congress could enact legislation to alter the system.

Preparing for retirement aside from Social Security

While Social Security tends to be the cornerstone of most people’s retirement plans, it should be considered as just one part of your overall plan to create income in retirement. A Northwestern Mutual financial advisor can help you determine the best asset allocation to reach your retirement goals, allowing you to still have the retirement you envision even if you don’t get all of your Social Security benefit. And depending on your situation, you may even be able to plan for a little left over, so you can leave a legacy for future generations.

In addition to Social Security, here are some sources of income you may consider incorporating into your retirement plan:

Guaranteed income

Guaranteed income—or fixed income—is an important part of retirement planning. This is money that you’re certain to get every month or year no matter how long you live or how the market is performing. Traditional sources of guaranteed income include Social Security and pensions, but you might also incorporate annuities into your retirement plan. Annuities are a good way to create regular income that you can’t outlive. Don’t overlook certificates of deposit as a form of fixed income investing and, when interest rates make it worthwhile, high-yield savings accounts for guaranteed interest on your cash.

Traditional 401(k)s and IRAs

Tax-deferred retirement accounts like traditional 401(k)s or IRAs give you a tax break for your contributions and also allow those contributions to grow on a tax-deferred basis. These types of accounts are critical for helping you build a nest egg that you will eventually use to help generate your retirement income.

Typically, these accounts will include investments that will help you continue to grow your funds in retirement, but they are also subject to market volatility. In addition, you’re required to pay income taxes on the funds you take out as retirement income, and when you reach a certain age, you’ll need to take required minimum distributions.

Roth accounts

Roth accounts are post-tax savings vehicles, which means that you’ve already paid taxes on the contributions you put into the account. But the funds in Roth 401(k)s and Roth IRAs grow tax-free and typically aren’t taxed when you take them out as distributions in retirement. Roth accounts can help you grow your net worth in preparation for retirement, but as with traditional 401(k)s and IRAs, the amount you have at retirement depends on the performance of your investments. However, the fact that you don’t have to pay taxes on distributions helps you better manage tax-related risks in retirement.

Permanent life insurance

Permanent life insurance can play an important role in a retirement plan. In addition to its lifetime death benefit, permanent life insurance also builds cash value, which isn’t affected by the markets. Many people use whole life insurance cash value to supplement retirement income, using it during market downturns or for additional tax efficiency (you can generally withdraw the basis that you paid into the policy tax-free). Knowing that you have an additional pool of funds to access can allow you to be more aggressive on the investment portion of your portfolio. Your death benefit can be an important part of your financial legacy.

Traditional investments

Many people also use traditional investments (which don’t get special tax advantages) to generate income in retirement. This income may take the form of capital gains, dividends or interest. The further you are from retirement, the more risk you’ll probably be able to take, which can also magnify what you can potentially earn. But as you get closer to retirement, shifting to safer investments—like mutual funds, which are a popular way to make one investment and be instantly diversified—can allow you to better plan for your retirement income.

Working with a financial advisor

While the amount of future Social Security payments may be in question, it’s likely that you will still get a significant portion of your benefits. The Social Security Administration has a Social Security calculator that can help you make a rough estimate, but predicting how much you’ll receive is more complicated if you’re going to retire after the trust fund reserves run out. No matter when you plan to retire, working with a financial advisor can make financial planning much easier.

A Northwestern Mutual financial advisor can work with you to show you how Social Security may look for your situation. Your advisor will also help you see how other parts of your financial plan can work together to help you generate the income you need in retirement. And most importantly, your advisor can give you some grounded perspective and help you prepare for risks you can’t control—like changes to Social Security. By helping you create a solid plan, your advisor can give you peace of mind that the money you worked hard for will be put to good use in retirement.