Things You Need to Know About Social Security: Will It Be There?

September 24, 2014

When I facilitate a workshop or webcast on retirement planning, I like to poll my audience to see which areas of retirement planning they would prefer to spend more time talking about. The audience generally ranks saving and investing for retirement as their top two choices but depending on who is in the audience, Social Security may rank as third. Even when it doesn’t, I find it amusing that a government benefit that some are skeptical will even be there by the time they retire ends up being the topic that generates the most questions. I guess it’s because it’s a source of retirement income that many are familiar with yet so few truly understand.

Regardless, it’s important to understand how this benefit works and how you can plan on using it to supplement your retirement income. Over the next several weeks, I will be addressing some of the more common questions I receive related to Social Security benefits. For starters, let’s take a look at a question that is on everybody’s mind: Will Social Security be there when I retire?

Although the Social Security trust fund is projected to run dry by around the year 2033, the trust fund is only part of the source of benefits. The majority of your benefits are paid out of tax revenue. Currently, employees pay 6.2% on earned income up to $117,000 a year in Social Security taxes. Your employer pays another 6.2%, for a total tax of 12.4%. If you are self employed, you pay both parts (i.e., 12.4%) in the form of self-employment taxes.

The revenue from Social Security tax is enough to cover roughly 75-80% of your benefits so if and when the trust fund does run out of money, you’ll still receive a Social Security benefit, but it may not be quite as much as you were expecting. For this reason, if you are not scheduled to receive benefits anytime soon, you may want to adjust your projections. Here’s how:

Run a Social Security estimate by visiting the Social Security website and clicking on the link to the Retirement Estimator.
Multiply your estimated benefit by a factor of 75-80% to get an adjusted benefit.
Convert your adjusted benefit into future dollars using this future value calculator.

Let’s look at an example. Let’s say your projected monthly benefit is $2,000 a month. Multiplying it by 75% would equate to $1,500 a month. Now let’s say you won’t be collecting your benefit for another 20 years. At a 3% rate of inflation, your benefit would be just over $2,700 a month when you start to collect it.

While there’s bound to be changes to the program between now and the year 2033, one thing you can be certain of is paying taxes and as long as that’s the case, there’s a good chance Social Security benefits will be around. What is not so certain is the amount you will receive. For this reason, use the steps above to adjust your expectations accordingly.