4 reasons why you shouldn’t rely on social security and 1 you should


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Social Security is the backbone of many Americans’ retirement plans. Unfortunately, that foundation is not as strong as you would like for a program that so many people rely on. According to Social Security’s own administrators, even before COVID 19 hit, the program’s trust funds were due to run out of money by 2035 – just 14 years from now.

While the status of the program at the end of 2020 has yet to be reported, the interim update released in November indicated that the pandemic was weakening many social security foundations even further. Objectively speaking, the future does not look good for Social Security, but all hope is not lost. With that in mind, here are four reasons why you shouldn’t rely on Social Security and one reason why you should.

Image source: Getty Images

N ° 1: Even at its strongest, it doesn’t add much

The average retiree receives $ 1,553.68 per month in Social Security benefits. While this is enough to keep people slightly above the federal poverty line, it roughly equates to a job of $ 9.32 an hour. That’s below the minimum wage in more than 20 states.

Therefore, if you think Social Security alone will provide you with a comfortable retirement, you should seriously think again. At best, it offers a somewhat decent bulwark against abject poverty and offers a lifestyle somewhere in the vicinity of a minimum wage job. Relying on Social Security for more than that exposes you to be deeply disappointed – at a time in your life when it is very difficult to earn and save enough to make up the difference.

N ° 2: Time is running out for a massive reduction in benefits

The latest report from the Social Security Trustee indicates that the program’s trust funds will be cash-strapped in 2035. Table 1 in the November 2020 Interim Update provided data suggesting that the COVID 19 pandemic may have accelerated that date until 2034. Either way, you’re 13-14 years from now, well into the life expectancy of many current retirees – not to mention future ones.

When trust funds run out, Social Security will only be able to cover between 76% and 79% of its expected benefits, using the money collected from dedicated taxes. Of course, even if this eventuality occurs, the program will still be able to provide Something, but it’s still only a fraction of what already started out as a modest benefit in the first place.

# 3: past fixes only kicked the box down the road

When Social Security was first introduced, the tax rate was 2% on the first $ 3,000 of your income – half covered by the employer and half covered by the employee. Now the rate is 12.4% on the first $ 142,800 of your income. Even taking inflation into account, it’s still a tax rate over six times higher on a salary basis almost three times what it was at the start of the program.

Despite all the additional funds spent on strengthening the program over the decades, Social Security is still on track to see its benefits cut by almost a quarter in the not too distant future. Even if you assume that Congress will come forward again to patch the program, you must be wondering how permanent this next patch will really be.

# 4: even if it’s fixed, you’ll probably pay for it

History indicates that the main ways in which Social Security is corrected are a combination of tax increases and benefit cuts. Basically it translates to “you are going to pay for any corrections made to the program, either higher taxes, lower benefits, or both.”

Since you’ll have to pay for any fixes you make anyway, one of the smartest things you can do to protect yourself is to start investing to try and close the gap. Think of it this way – if benefits are reduced, then whatever you’ve saved to close the gap will help improve your retirement lifestyle. On the flip side, if taxes go up, it’s often much easier to cut back on your investments than it is to cut back on your lifestyle to cover those tax increases.

Either way, you’ll likely pay for any fixes offered to help protect Social Security. Being prepared in advance by investing now will help soften the inevitable blow when it comes.

Yet all hope is not lost

Despite the very real and well-known structural challenges that Social Security faces, there is still very good reason to believe that the program will always be there for its beneficiaries. The reason is this: Social Security remains a very popular and strongly supported program. In fact, it’s commonly referred to as the “third rail of American politics” – like touching it, and you die, just like touching the electrified third rail of an electric-powered railroad track.

This high popularity means that Social Security is very unlikely to be allowed to go bankrupt. Whether through higher taxes, reduced benefits (or possibly, a combination of the two), Social Security will most likely be corrected again. Once this patch is in place, people will once again be able to count on the program as a safety net to keep them out of abject poverty in retirement.

Recognize social security for what it is – and plan for it

If there is one advantage among the challenges facing Social Security, it is this: What the program can and cannot provide is perfectly clear to anyone who cares to pay attention. When you are in the process of planning for retirement, you can use this information to better prepare yourself for overall success.

Ultimately, there is still good reason to believe that Social Security will always provide a basis for the retirement plans of most Americans. Remember, it was never intended and was never intended to be more than just a foundation. Treat it accordingly and build a solid overall plan around it, and you will increase your chances of having a financially comfortable retirement.

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Julio V. Miller

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