Even if Social Security Survives, You Should Still Save on Your Own

“Will Social Security even exist when I retire?” That’s often the first question young professionals ask me when I start talking about saving for retirement. 

I can’t predict the future, but my philosophy is always “hope that it will be around, but plan like it won’t.” When you finally reach retirement age, you want to be able to travel the world, eat at your favorite restaurants, help pay for your grandkids’ college, and cover those massive medical expenses. You’ll need all the help you can get!

A little background– the Social Security Act was first passed in 1935, in the wake of the Great Depression, spearheaded by President Franklin D. Roosevelt. Social Security has always been funded by a combination of payroll taxes on employees and employers, starting at 1% each (2% combined) and initially projected to rise to 3% each (6% combined) by 1950. (One note – although the “employer” portion of the tax is technically paid by employers, economists generally agree that employees are the ones that really bear the cost of this tax through lower wages. As a result, when discussing the payroll tax rates used to pay for Social Security’s retirement benefits, it’s usually easier to combine the employee / employer portions – which are 5.3% each or 10.6% combined today.) 

Though the program was intended to be self-sustaining, several policy and demographic changes have stretched its finances over time. Because of surpluses in Social Security and other spending priorities (including WWII), Congress froze the planned tax increases in the 1940s and 1950s. Through the early 1970s, Congress also expanded the list of occupations covered by Social Security (only 40% of civilian workers were covered under the initial program, now it is closer to 95%) and made significant increases in benefits (eventually tying future increases to inflation in 1975).

There is no doubt that Social Security has been an incredibly successful program in reducing poverty among the elderly, and benefit payments in 2019 constituted 4% of the total U.S. gross domestic product. However, looking forward, there are significant challenges ahead for the program. In 1955, there were more than 8 workers contributing into the system for each beneficiary, but because of more retirees, longer life expectancies, and lower birth rates, today there are only 2.8 workers per retiree (expected to fall to 2.2 in the next 15 years). 

The Social Security Administration summarizes these challenges simply: “Social Security is not sustainable over the long term at current benefit and tax rates.” That’s partly why three times as many young Americans would prefer to save more for retirement on their own rather than raise taxes and benefits in the Social Security system.

Social Security’s next major financial crisis is coming in 2035  (or sooner, based on to-be-determined impacts from COVID-19), when the “trust funds” (built from previous surpluses in the program) are expected to be depleted. When this happens, Congress will need to agree on significant policy changes – either cutting benefits, raising taxes, or some combination of the both to ensure the program continues to meet its promises fully. Many recent presidents have tried and failed to solve this financing issue through bipartisan commissions, and another bipartisan plan recently introduced by Sen. Mitt Romney (R-Utah) is already drawing criticism. If previous financial crises are any indication, Congress will wait until the last possible moment and pass a grand compromise that pretty much everyone is unhappy with. 

So how does this uncertainty affect your personal finances? Most importantly, you should start saving as early as you can for retirement, as I discussed in a previous post. Even just saving a few thousand dollars per year in your 20s could add up to hundreds of thousands in extra wealth when you retire. 

Confused about where to start? Check out the retirement planning guide from NerdWallet, one of my favorite personal finance websites. The bottom line – max out any “matching dollars” from your employer retirement plan first, then potentially open an individual retirement account (IRA) to start saving on your own. 

Building your own retirement security will reduce stress later in life when you’re planning how to pay your bills without a regular paycheck. Because of the complexity in the program, there are also a variety of strategies to maximize your benefits– including things like delaying benefits until age 70 – that will only be possible if you have another source of savings to draw from first.

If something happens to Social Security (or the benefits are lower than we expect), you’ll want your own savings to rely on. Even if you are optimistic that Congress will agree on sustainable reforms to preserve your full Social Security benefits, most people don’t realize that your benefits will likely replace only 40% of your pre-retirement income. The rest needs to come from somewhere!