Why don’t I rely on Social Security, and neither should you | personal financing
Millions of Americans rely on Social Security to cover a large portion of their retirement. The program has been paying benefits since 1937, and Congress has repeatedly reformed Social Security since its launch to keep it solvent. Despite this history and the reforms deployed over time, Social Security is rapidly heading for another funding crisis. According to the trustees of the program, it is expected that the Social Security trust funds will run out of money by 2035, which could reduce benefits by about 25%.
Although Congress will likely once again overhaul the Social Security system, there are several structural reasons why it will look different this time. Because of these differences, I’m not counting on Social Security to provide it to me when I reach retirement age, and frankly, neither should you. Read on to understand the main reasons for this.
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Social Security has become incredibly heavy recipients
The good news is that life expectancy rose around the time Social Security first started. The bad news is that longer life is wreaking havoc on the “pay-as-you-go” financing model on which Social Security depends. For example, in 1945, there were approximately 42 workers for each covered beneficiary. These days, that ratio is closer to 2.7 to 1.
This downward shift in the ratio between workers and beneficiaries is a major reason why the Social Security tax rate has risen from 2% in 1937 to 12.4% today. (Note that if you are an employee, half of the Social Security tax is paid directly by your employer and generally does not appear to you on your paycheck.) When you add a lower birth rate to align with improved longevity, this percentage is likely to get worse over time. This will likely result in higher tax rates to cover the same benefits.
Stagflation will only make matters worse
On top of those real demographic challenges, current economic conditions also line up to make the challenges very difficult for Social Security this time around. Stagflation – the combination of low or negative economic growth with high inflation – is especially It poses a risk to Social Security financing.
This is because Social Security offers its beneficiaries an inflation adjustment for their payments each year. Because Social Security is largely a pay-as-you-go system, these inflation adjustments come from the same sources of regular benefits—largely taxes on workers and those that empty trust funds quickly. who – which may be It’s okay if wages are growing fast enough to keep up, but since inflation started accelerating in early 2021, it hasn’t.
Or, in other words, add higher benefit costs and slower wage growth (and the real risk of job losses in the current economy) to an already difficult employee-to-beneficiary ratio, the future looks really bleak.
All this pain for what exactly?
Despite the already heavy burden on employees that is only likely to increase given the program’s structure and current economic realities, the average retiree gets $1,668 per month from Social Security. At best, this provides a “safety net” lifestyle, not much higher than the poverty level. For retirees who rely on Social Security, these funds must cover Medicare premiums, rent and/or property taxes, food, clothing, transportation, and utilities at a minimum.
In fact, the program itself notes that it is only designed to cover 40% of a retiree’s typical income before retirement. Herein lies the problem. Social Security has a very expensive and unsustainable financing mechanism and is on its way to particle challenges, all to pay for what ultimately amounts to rather modest benefits.
While I believe Social Security will be reformed again, mere corrections will not change the core challenges to program financing. And they will not change the fact that on average benefits provide a basic lifestyle safety net for beneficiaries. This is why I don’t rely on Social Security, and you shouldn’t either.
Get started today with Social Security like icingnot the cake
Sure, even if nothing changes, Social Security can still expect to be able to pay about three-quarters of the expected benefits over time. So it is likely that the program will continue to offer it Something for its beneficiaries. However, three-quarters of $1,668 amounts to $1,251 per month. This is a reasonable Appendix For the lifestyle that a decent nest egg provides, but on its own, it hardly lives a subsistence life.
Treating Social Security like a dessert cake, rather than the cake itself, is a much healthier mindset than relying on Social Security to provide a significant portion of your retirement income. While it is healthier, it is also a mindset that needs to be put into place much earlier retirement to take advantage of it. So get started now, and give yourself the best chance of putting a plan in place to build an egg that can provide the core of your retirement income.
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Chuck Saletta does not have a position in any of the stocks mentioned. The Motley Fool does not have a position in any of the stocks mentioned. Motley Fool has a disclosure policy.