2 Legitimate Social Security Worries, and 1 Reason Not to Be Concerned

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While a strong case can be made that Medicare is America's most important social program, and there is a chance it could be a few decades from now, Social Security probably plays a more critical role in the financial well-being of many seniors. Every month, more than 42 million seniors receives a check from Social Security, and a little over three out of five of these seniors relies on their stipend for at least half of their income. In fact, a third of seniors relies on Social Security for at least 90% of their monthly income.

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As you might imagine, with Social Security holding such high importance for seniors, any rumors or concerns about the program are bound to rile up seniors, pre-retirees, and even working Americans who one day hope to receive a benefit check of their own during retirement. Some of these concerns – two in particular -- have validity, and they should be something pre-retirees and retirees think about. On the other hand, one Social Security worry isn't something that any workers or retirees should concern themselves with.

Legitimate worry No. 1: Social Security benefits will be cut in the future

One of the biggest concerns for current and future retirees is what could happen with Social Security's payouts.

According to the Social Security Board of Trustees' annual report released earlier this year, the program is headed for a major inflection point as of 2022. Due to the ongoing retirement of baby boomers to the tune of more than 10,000 per day, as well as lengthening life expectancies, the Social Security Trust is expected to begin paying out more in benefits than it's collecting in revenue by 2022. By 2034, the $3 trillion in asset reserves will be depleted, leading to what the Trustees opine could be a cut to benefits of up to 23% in order to sustain the program through the year 2091. 

The average retired worker was receiving $1,371.14 a month from Social Security as of August 2017 , which was a decent amount above the federal poverty level. If Social Security benefits were slashed by 23%, the average retiree would only be netting $1,055.78 a month (in 2017 dollars). That's less than $1,000 above the federal poverty level on an annual basis.

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There are numerous ways that Social Security's $12.5 trillion shortfall between 2034 and 2091 can be bridged, including raising new revenue and cutting back benefits. Unfortunately, little is getting done in Washington that suggests a resolution is coming anytime soon. Without additional revenue, a cut to benefits is a growing possibility.

Legitimate worry No. 2: You'll claim Social Security benefits too early

Another legitimate worry that future and even recent retirees should have is that they jump the gun and file for benefits too early.

For those not familiar with Social Security's claiming schedule, an individual is able to begin taking benefits as early as age 62, and at any point thereafter. Your benefits grow by approximately 8% per year beginning at age 62, and up until age 70. Thus, waiting to file for benefits can result in a much larger payout later.

The most important figure you need to know is your full retirement age, which is determined by your birth year. Your full retirement age is the point at which the Social Security Administration deems you eligible for 100% of your benefit. In the simplest terms, if you claim at any point before reaching your full retirement age (i.e., age 62 through one month prior to your full retirement age), your benefits are permanently reduced. Depending on your birth year, this could be up to a 30% reduction per month from your full retirement age benefit. Conversely, waiting until age 70 could boost your payout by 24% to 32%, depending on your birth year.

The obvious worry for early claimers is that they may not have enough income to meet their monthly expenses – and this is magnified by the possibility of a 23% haircut to benefits in just 17 years.

One of the biggest mistakes you can make is filing for benefits early if you have little or nothing saved for retirement. At least three in five Social Security recipients claims before their full retirement age, permanently reducing their payout. Not exactly a smart move if you're going to be heavily reliant on Social Security income.

You have nothing to worry about: Social Security won't go bankrupt

Finally, if the majority of the population would stop worrying about Social Security going bankrupt, that would be great!

As noted, the Trustees expect Social Security's asset reserves of $3 trillion to be completely gone by 2034. Many are viewing this depletion as an insolvency for Social Security, which would lead to bankruptcy. Fortunately, that's not the case. In fact, barring a Congressional change in the way that Social Security is funded, it's impossible to bankrupt.

America's most important program is funded three ways. The smallest contributor comes from the taxation of benefits. Yes, Social Security benefits are taxable if you earn too much annually, and in 2016 the taxation of benefits brought in $32.8 billion of the $957.5 billion the program collected. 

Secondly, interest earned from its asset reserves contributed $88.4 billion of the $957.5 billion. Social Security's more than $2.9 trillion in current asset reserves are primarily invested in special issue bonds, with a small amount in certificates of indebtedness.

The bulk of Social Security's revenue ($836.2 billion last year) is derived from a 12.4% payroll tax on earned income between $0.01 and $127,200, as of 2017. This tax isn't going to go away, even if the program's asset reserves are completely gone. Put simply, as long as people keep working, payroll tax dollars will be collected. Thus, Social Security will always have money flowing in that can be disbursed to eligible recipients.

Now, to be clear, this doesn't mean that Social Security's current payout schedule is sustainable. Forecasts from the Trustees are very clear that it's not. Therefore, while benefit cuts are a legitimate concern, the program going bankrupt is a silly worry. Social Security will be there when you retire. The real question is, in what capacity?

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