Ask your average American born after 1964 what they think about Social Security and they will probably say something like, “I’ll never see any of it. When I get those statements in the mail I just throw them away.” For this we have to thank (among others) novelist Douglas Coupland, author of Generation X, who back in 1991 said in an interview, “I don't think anyone honestly expects to collect a single penny they pay into Social Security...The day you want to go collect your money the system will have just gone bankrupt buying a jewelled stereo system for Jane Fonda's walker.”
It is true that timing is terribly unkind to me and my peers—the Social Security trust fund reserves will be depleted in 2033, the same year I will be turning 65, according to the most recent board of trustees report.
And it is equally true that this depletion will be due to ballooning expenditures for Baby Boomer beneficiaries that will begin to create a steeply rising deficit in about 2019. But this does not mean that Social Security will not be there for me when I retire—which is what more than 80% of Millennials and Gen X-ers believe, according to a survey released last monthby the TransAmerica Center for Retirement Studies.
Social Security gets money to make payments to retirees in three ways: through taxes on current workers, through taxes on the benefit payments, and through interest income on a trust fund of about $2.6 trillion as of the end of 2013. (The Department of the Treasury invests the trust fund in special, non-marketable government securities, which may explain why it only made 3.75% last year—more on that later.) As the program begins to run a larger and larger deficit, the shortfall will be made up by eating into the reserve fund itself. That’s what will be depleted by 2033, but not the entire program, which anticipates being able to pay approximately 75% of scheduled benefits between 2033 and 2088.
75% isn't as good as 100%, but I’ll take it. (I'm not as sure about deferring benefits to age 70, even though the economic advantages of doing so make Michael Kitces describe deferral as “the best annuity money can buy.”)
According to projections done by the Employee Benefit Research Institute, between 73% and 76 % of people in 401(k) plans will still have a “successful” retirement (defined as being able to replace between 60% to 80% of pre-retirement income) even with reduced Social Security benefits, compared to between 83% and 86% of people reaching “successful” retirement at current Social Security benefit amounts.
Those projections assume a retirement at age 65. They also assume that nothing will be done to “fix” the projected shortfall, such as raising taxes or more actively managing the trust fund investment to get a higher return, both of which would be extremely controversial solutions. Something must be done, if only, as the trustees warn, to avoid the increasing strain that the trust fund deficit will also put on the unified Federal budget. If there’s one fiscal issue Millenials and Gen Xers could both rally around, this should be it, and yet the problem seems to be met with apathy, perhaps owing to the misunderstanding that we no longer have anything at stake.
I used to like getting those statements of estimated benefits, the ones called "what Social Security means to you." After suspending those mailings due to financial cutbacks, Social Security will once again send estimates but only at five-year intervals (you can also get them online.) Don't disregard them. Social Security will still mean an awful lot.
Konigsberg is the author of The Truth About Grief, a contributor to the anthology Money Changes Everything, and a director at Arden Asset Management.
More on Social Security:
- The 5 Key Things to Know About Social Security and Medicare
- How to Fix Social Security—and What It Will Mean for Your Taxes
- 3 Smart Fixes for Social Security and Medicare