The Social Security trust fund is projected to run out of money, but that doesn’t mean you won’t get any Social Security benefits when you retire.
You and your employer pay taxes into Social Security—but it’s not set aside for you personally. It is combined with other money to provide benefits.
You’ll likely be able to plan on receiving a portion of your retirement benefit—such as 71 to 77 percent.
According to the Social Security Administration, Social Security retirement benefits will be payable in full through some point in 2033, but what if you’re planning to retire after that point? News reports that Social Security won’t be around when you retire may have you worried, but the situation may not be as bad as you think. Let’s look at the facts around Social Security’s future and how they can impact your retirement planning.
Is Social Security going away?
Today’s Social Security benefits are paid mostly through annual taxes. Unless you’re self-employed, you split the Federal Insurance Contributions Act (FICA) tax, a dedicated payroll tax, with your employer. As you work and pay FICA taxes, you earn credits for Social Security benefits. But the benefits the program currently pays exceed the tax revenue allocated for Social Security. Because of that, the program has been spending down its trust fund. When the trust fund is depleted, tax revenue coming in through the FICA taxes will allow Social Security to continue paying out a percentage of benefits, but not the full benefit.
The Social Security Administration projected in March 2023 that trust fund reserves will be depleted in 2033, but taxes contributed by taxpayers are still expected to cover more than 70 percent of scheduled benefits. And that’s if Congress does nothing to fix the problem. There are a number of potential solutions, including increasing taxes (on everyone or only on high-income workers) that fund the program, changing eligibility for benefits (e.g., raising the full retirement age), lowering the benefit amount or a mix of solutions. Bills to address the issue have been introduced, but none have yet passed.
So, while many news stories are sounding the alarm, it’s probably premature to panic about what will happen with Social Security runs out. While most experts predict that your benefit amount may be lower, it’s likely you will still receive some money. And depending on when you plan to retire, having this information now gives you time to adjust and plan ahead, which could minimize the impact on your retirement income.
The money you pay in taxes is not held in a personal account for you to use when you get benefits. Today’s workers help pay for current retirees’ and other beneficiaries’ benefits. Any unused money goes to the Social Security trust funds to help secure today and tomorrow for you and your family.
— Social Security Administration, May 2023
Why is Social Security running out?
The major problem is demographics. As older generations—specifically the Baby Boomers—hit retirement age, more people are accessing the benefit at once and there aren't enough people in younger generations to replenish the trust fund. In other words, there are more people receiving benefits and accessing the Social Security trust fund than there are people paying into it. Things like inflation and interest rates can also affect the trust fund balance, though in a much smaller way than demographics.
What will happen when Social Security runs out?
Again, Social Security will not completely run out. But, if you retire at a time when there are no reserves in the trust fund, here are some projections of what may happen:
- The Social Security Administration projected in March 2023 that continuing income will provide for 77 percent of scheduled retirement benefits when the “Old Age and Survivor’s Income” trust fund is depleted. If no changes to FICA taxes are legislated, then it’s projected that 71 percent of scheduled benefits will be payable through 2097.
- Considering this, one way you can plan for retirement is to budget to receive between 71 and 77 percent of scheduled benefits after 2033.
- Keep in mind that things could change. Projections shift year-to-year and Congress could enact legislation to alter the system.
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Preparing for retirement aside from Social Security
While Social Security tends to be the cornerstone of most people’s retirement plans, it should be considered as one part of your overall plan to create income in retirement. A Northwestern Mutual financial advisor can help you create the right mix of assets to reach your retirement goals, allowing you to still have the retirement you envision even if you don’t get all of your Social Security benefit. (Depending on your situation, you may even be able to plan for a little left over to leave a legacy to future generations.).
In addition to Social Security, here are some sources of income you may consider incorporating into your retirement plan:
Guaranteed income is an important part of many people’s retirement planning. This is money that you’re certain to get every month or year no matter how long you live or how the market is performing. Traditional sources of guaranteed income include Social Security and pensions, but you might also incorporate annuities into your retirement plan. Annuities are a good way to create regular income that you can’t outlive.1 Don’t overlook Certificates of Deposit as a form of fixed income investing and, when interest rates make it worthwhile, high-yield savings accounts for guaranteed interest on your cash.
Traditional 401(k)s and IRAs
Tax-deferred retirement accounts like traditional 401(k)s or IRAs give you a tax break for your contributions and also allow those contributions to grow on a tax-deferred basis. These types of accounts are critical for helping you build a nest egg that you will eventually use to help generate your retirement income.
Typically, these accounts will include investments that will help you continue to grow your funds in retirement but are also subject to market volatility. In addition, you’re required to pay income taxes on the funds you take out as retirement income, and when you reach a certain age, you’ll need to take required minimum distributions.
Roth accounts are post-tax savings vehicles, which means that you’ve already paid taxes on the contributions you put into the account. But the funds grow tax-free and typically aren’t taxed when you take them out as distributions in retirement, which also makes them qualified accounts. Roth accounts can help you grow your net worth in preparation for retirement, but as with traditional 401(k)s and IRAs, the amount you have at retirement depends on the performance of your investments. However, the fact that you don’t have to pay taxes on distributions helps you better manage tax-related risks in retirement.
Quiz: Do You Know as Much as You Should About Social Security?
Whole life insurance
Whole life insurance can play an important role in a retirement plan. In addition to its lifetime death benefit, whole life insurance also builds cash value, which isn’t affected by the markets. Many people use whole life insurance cash value to supplement retirement income, using it during market downturns or for additional tax-efficiency (you can generally withdraw the basis that you paid into the policy tax-free)2. Knowing that you have an additional pool of funds to access can allow you to be more aggressive on the investment portion of your portfolio. Your death benefit can be an important part of your financial legacy.
Many people also use traditional investments to generate income in retirement. The more time you have, the more volatility you’ll probably be able to tolerate in exchange for growth potential over time. But as you get closer to retirement, shifting to safer investments—like mutual funds with a conservative strategy—can allow you to better plan for your retirement income3.
Working with a financial advisor
While the amount of future Social Security payments may be in question, it’s likely that you will still get a significant portion of your benefits. The Social Security Administration has a Social Security calculator that can help you make a rough estimate, but predicting how much you’ll receive is more complicated if you’re going to retire after the trust fund reserves run out. No matter when you plan to retire, working with a financial advisor can make financial planning much easier.
A Northwestern Mutual financial advisor can work with you to show you how Social Security may look for your situation. An advisor will also help you see how other parts of your financial plan will work together to help you generate the income you need in retirement. And most importantly, an advisor can give you some grounded perspective and help you prepare for risks you can’t control—like changes to Social Security. By helping you create a solid plan, an advisor can give you peace of mind that the money you worked hard for will be put to good use in retirement.
1. All guarantees in annuities are backed solely by the claims-paying ability of the issuer.
2. The primary purpose of permanent life insurance is to provide a death benefit. Using permanent life insurance accumulated value to supplement retirement income will reduce the death benefit and may affect other aspects of the policy and/or result in an unexpected taxable event.
3. No investment strategy can guarantee a profit or protect against a loss.
Social Security is an important part of your financial plan.
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