It can rightly be said that no program in the U.S. is more important to the financial well-being of our retirees than Social Security. An analysis conducted by the Center on Budget and Policy Priorities (CBPP) found that the mere presence of Social Security income pushed the senior poverty rate down to 8.8% (poverty was considered $11,367 or less in annual income in 2015). Without Social Security income, the CBPP estimated that the senior poverty rate would skyrocket to north of 40%.
Social Security is also a program that current and future retirees plan to lean on pretty heavily. Data directly from the Social Security Administration finds that 61% of current beneficiaries count on their monthly checks to provide for at least half of their monthly income. Meanwhile, a Gallup poll from April 2016 found that 29% of non-retirees expect Social Security to be a major source of income, and 50% expect it to be a minor source. Another way of looking at this data is, roughly four out of five of today's workers will need Social Security to make ends meet.
A lot of working Americans don't expect to receive anything from Social Security
But Social Security itself isn't in good shape. According to the 2016 report from the Social Security Board of Trustees, the program has a long-term (75-year) actuarial deficit of 2.66%, and is slated to begin paying out more in benefits than it generates in revenue by 2020. Further, the $2.85 trillion that was in the Trust's asset reserves as of the end of 2016 is expected to be completely gone by 2034. The Trustees believe that this absence of Social Security's excess cash could result in a benefits cut of up to 21% for current and future retirees.
But that's not how the public necessarily views Social Security's asset reserve depletion. Gallup's 2016 poll on Social Security found that 46% of respondents worry a "great deal" about Social Security's future, with another 25% saying they worry a "fair amount." Amazingly, this combined 71% is the lowest in more than a decade, but it's still indicative of the belief among retirees and non-retirees that Social Security is in big trouble.
More specifically, though, there's a rampant belief among today's working Americans that Social Security's asset reserve depletion means the program will not be there for them when they retire. A 2014 Pew Research Center poll of millennials found that 51% believed Social Security was headed toward bankruptcy, while Gallup's 2016 poll shows a fairly consistent number of respondents (near 50% or higher) who don't believe Social Security will pay them a benefit in retirement. You can see that in chart form below.
Half of all working Americans have this wrong
Yet here's the really interesting statistic: Roughly half of all working Americans surveyed by Gallup between 1989 and 2015, a 26-year timespan, are completely wrong about the future path of Social Security. It'll never go bankrupt, and it will be paying benefits for many future generations of retirees to come.
The Social Security program is funded in three ways: payroll taxes, interest earned on its asset reserves, and the taxation of benefits. The latter two play a relatively small role in revenue generation, with the taxation of benefits providing $31 billion of the $920 billion in revenue for the program in 2015, and interest accounting for $93 billion. Though it should be pointed out that interest income will disappear once the Trust's asset reserves are gone by 2034.
The bulk of funding for Social Security (more than 86%) comes from the 12.4% payroll tax on earned income. The responsibility of the payroll tax is often split down the middle between employers and employees, meaning if you work for someone else you'll pay 6.2%. The self-employed get stuck with the full 12.4% payroll tax.
Furthermore, the payroll tax only applies to earned income between $0.01 and $127,200 (as of 2017). Any earned income above this level is exempt from the payroll tax, albeit this maximum taxable earnings figure often adjusts upward with inflation.
What this means is that as long as Americans keep working, the payroll tax will continue to be collected, funneling revenue into Social Security. While it's very possible that benefits could be cut given the expected rise in the number of eligible retirees, the program will continue to generate revenue and disburse that revenue out to eligible seniors.
In other words, half of all Americans have been answering a question about whether Social Security will be there for them when they retire wrong for 26 years.
The good news is you will receive a benefit check from Social Security, assuming you have enough work credit to qualify. The bad news is there's a pretty decent chance your payout will be cut if Congress continues to sit on its laurels instead of fixing Social Security. What working Americans should really be focusing on are ways to distance themselves from relying heavily on Social Security income in retirement. This means focusing on budgeting, investing, and tax-planning.
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