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If you plan to rely solely on your social security check for your retirement, you may want to reconsider your decision. Here's why.
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You are almost guaranteed to be surprised by the answer.

Two social security cards based on a large stack of cash bills.(Photo: Getty Images)

Social security is unequivocally the country's most important social program.

Every month, more than 62 million Americans earn a check for benefits, on which 62% of older beneficiaries count for at least half of their income. Without social security, retired workers, older people and even spouses and / or surviving children of deceased workers could experience significantly higher poverty rates.

But even though Social Security has done so for nearly eight decades, it has not prevented the program from having problems. A number of ongoing demographic changes, combined with Congress inaction, are turning social security into a tumultuous path.

In fact, the fear regarding the long-term prospects of Social Security has become so obvious that a poll conducted by the Pew Research Center in 2014 found that 51% of millennials did not expect the program to be in place when they retire.

Social security has problems, but the lack of liquidity is not part of it

The big question that many people (especially Generation Y) probably ask about social security, given its many problems, is: when exactly will the program run out of schedule? money?

Believe it or not, the honest answer, assuming no change is made to the mode of financing social security, is: never.

Without a doubt, social security has its problems. The ratio of workers to beneficiaries is expected to decrease until 2035, as baby boomers leave the labor market and become eligible for a pension benefit. There are simply not enough new workers for these retired baby boomers to support the worker / beneficiary ratio.

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Retirees also live much longer than five or six decades ago. Average life expectancy has increased by nine years since 1960, and the percentage of Americans reaching the qualifying initial age of 62 has also increased substantially.

Even income inequality has surfaced and harmed social security. We see a higher percentage of earned income being exempted from the social security payroll tax – $ 300 billion in 1983 versus $ 1,200 billion in 2016 – while finding that affluent people are living significantly longer than the low-income people for whom the system was designed. protect. In the end, this means that much of the income from social security ends up in the hands of the rich.

The social security cash surplus could soon disappear …

But the biggest concern of all is the point of inflection that the program has hit. According to the Trustees' latest annual report, Social Security will spend more than its revenues this year for the first time since 1982. Although its estimated net outflow ($ 1.7 billion) is relatively small, next to the 2 , 89 billion currently held in asset reserves, this output is expected to increase rapidly from 2020 and beyond.

The misconception that program fund reserves will be exhausted by 2034 builds on administrators' latest prediction that social security cash surpluses come into play. In the event that this cash surplus would exhaust as planned, a generalized reduction of benefits of up to 21% may be needed to maintain payments until 2092, without the need for further reductions.

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So, to be clear, the social security cash surplus could very well be depleted in less than two decades. But it is not the same as saying: "Social security will run out of money". Even if the program does not have a surplus of money, it can continue to distribute a benefit check to eligible recipients, thanks to its two sources of recurring revenue.

… but his recurring revenue sources ensure that he will never run out of money

Currently, social security has three sources of funding. Assuming that Congress does not act and that the Trust's asset reserves are actually depleted, one of these sources – the interest income generated on its cash surpluses – disappear. Nevertheless, there are two sources of recurring revenue that guarantee the continuity of payments.

The first is the social security payroll tax, a 12.4% tax on earnings earned between $ 0.01 and $ 128,400, starting in 2018. As long as Americans continue to work and the Congress will not eliminate the payroll tax as a source of revenue, the payroll tax will remain the heavy hitter of the program, so to speak. In 2017, payroll taxes generated $ 873.6 billion of the $ 996.6 billion raised.

The second recurring source of income is the taxation of benefits. Signed into law in 1983 and implemented in 1984, benefit taxation allows beneficiaries who earn above certain thresholds – adjusted gross income plus a half-benefit greater than $ 25,000 for individuals and $ 32,000 USD for couples filing jointly – to tax a portion of their Social Security benefits at ordinary federal tax rates. In 2017, the taxation of benefits raised $ 37.9 billion.

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As long as these two sources of income remain intact, the Social Security Administration will always have money to distribute to eligible beneficiaries. The program just can not run out of money … already. This does not mean that payments are not subject to potential reductions over time – but this suggests that social security will not go bankrupt.

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