Welcome to the “2-Minute Money Manager,” a short video feature answering money questions submitted by readers and viewers.
Today’s question is about Social Security; specifically, whether America’s retirement plan will still be around when those now in their 30s and 40s reach retirement age.
Watch the following video, and you’ll pick up some valuable info. Or, if you prefer, scroll down to read the full transcript and find out what I said.
You also can learn how to send in a question of your own below.
For more information, check out “7 Reasons It’s Dumb to Claim Social Security Early” and “Social Security Q&A: Am I Taking My Benefit Too Soon?” You can also go to the search at the top of this page, put in the words “Social Security” and find plenty of information on just about everything relating to this topic.
Got a question of your own to ask? Scroll down past the transcript.
Don’t want to watch? Here’s what I said in the video
Hello, and welcome to your “2-Minute Money Manager.” I’m your host, Stacy Johnson, and this answer is brought to you by Money Talks News, serving up the best in personal finance news and advice since 1991.
Today’s question comes from Sara:
“I’m 40, and I keep reading that there won’t be any Social Security left by the time I retire. This doesn’t seem fair, since they’re taking money out of my paychecks to pay for it. Am I right to worry?”
What’s old is new again
When I was a Wall Street investment adviser, I had many conversations with both clients and peers about the impending demise of Social Security.
That was in the 1980s.
I wouldn’t be surprised to learn people have been predicting the downfall of Social Security since its creation in 1935. And yet, here it is, still chugging along.
So, why do you keep seeing headlines suggesting the system is in trouble? Well, because it often is.
There were headlines earlier this year suggesting Social Security trust funds will run dry by 2035 if nothing is done to cure a funding shortfall. And these stories are often heavily promoted by those most likely to benefit: investment advisers.
But here’s the thing: Headlines like these have popped up many times over the years. And something, at least thus far, has always been done to cure the funding shortfall.
So, the short answer to your question, Sara, is that Social Security is highly likely to be around when you reach retirement. The reason is simple: There will always be a monster group of voters like me — I’m 63 — who can see the light at the end of the tunnel and will be super unhappy if we don’t get anything out of a pension we paid into for more than 35 years.
That being said, however, your Social Security may not look the same as it does today.
Social Security changes through the years
Social Security has had lots of changes over the years. A few examples:
- When the program started, the government took 1% from paychecks to fund it. Now it’s 12.4%, half coming from you and half from your employer.
- The amount of income subject to the tax has gone up: When the program started, only the first $3,000 of your income was taxed. In 2019, the tax applies to the first $132,900.
- In 1935, you could start receiving full benefits at 65. While that’s still the retirement age for some, full retirement age is now as high as 67, depending on when you were born.
- Until 1983, Social Security payments were nontaxable. Now, however, depending on your overall income, up to half your benefit can be taxable.
These are not only examples of how the program has changed over the years, they’re also examples of how it could change in the future, as well as how subtle changes will likely keep Social Security viable.
If the Social Security trust fund starts running low, Uncle Sam could raise any of the above. He could increase the percentage you pay, your employer pays, or both. He will almost certainly continue to levy the tax on ever-increasing portions of your income.
And the thing that’s already started and is most likely to continue? Raising the retirement age.
Will 70 be the new 65?
According to the National Center for Health Statistics, just 100 years ago, the average life expectancy for men was around age 50. Today, that number is closing in on 80. So, back in the day, people worked until they were literally at death’s door. They certainly didn’t spend decades in retirement.
Considering that fact, while making 70 your new retirement age may not sound appealing, it’s not unreasonable. So if I were a 40-year-old today, I’d expect a higher retirement age than today’s. In fact, as I offer advice to people my age, I often suggest they work until 70, especially if they, like me, enjoy what they’re doing and have some degree of flexibility in how often they do it.
Don’t get too relaxed
While you may be cheered by the news that Social Security may live as long as you do, don’t be fooled: Social Security isn’t your sole retirement solution.
As I’m fond of saying, Social Security was designed to keep seniors from a dog-food diet, not to fund a fulfilling retirement. And while it may not disappear, it’s highly unlikely to become more generous.
Bottom line? Think of Social Security as the icing. You still need to bake your own retirement cake. Learn how with tools like our retirement course.
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The questions I’m likeliest to answer are those that come from our members. You can learn how to become one here. Questions should also be of interest to other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.
I founded Money Talks News in 1991. I’m a CPA, and I’ve also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate.
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