Life Events

Younger workers often wonder whether Social Security will still be there for them. The honest answer is that it is likely to continue, but its future form is a matter for Congress, and it was never designed to be your only source of retirement income.

How the system is funded

Social Security is largely a pay-as-you-go program. Payroll taxes collected from today's workers and employers fund today's benefits, and any surplus is held in trust funds. When benefits paid out exceed income, trust fund reserves are drawn down.

What the trustees say

Each year the Social Security trustees publish a report projecting the program's finances. In recent reports, they have projected that the trust funds could be depleted at some point in the future, after which incoming payroll taxes would cover only a portion of scheduled benefits unless lawmakers act. That is a projected shortfall, not a promise that benefits will disappear. You can read the latest findings at ssa.gov.

What could change

Lawmakers have changed the program before, and the options are well known: adjusting payroll taxes, raising the earnings subject to tax, modifying the retirement age or benefit formulas, or some combination. Any change would likely phase in over time, and people already near retirement have usually been affected least.

A sensible approach

• Treat Social Security as one leg of the stool. It was designed to replace only part of your pre-retirement income.
• Plan with a cushion. Some planners test their plan with a reduced benefit assumption to see how it holds up.
• Save in other accounts. Employer plans, IRAs and taxable savings give you income you control.
• Consider working or phasing out a little longer. Each additional year of earnings and delayed claiming can strengthen your position.
• Check your estimate. The statements you get from the Social Security Administration show your projected benefit under current law.

What not to do

Avoid claiming early solely out of fear that the program will vanish. Claiming at 62 permanently reduces your benefit, and for many people that is the less favorable choice. Equally, avoid assuming that the benefit will cover everything you need.

Other income sources

A well-rounded plan may include pensions, annuities, part-time work, rental income, and withdrawals from savings, with attention to taxes. The order in which you draw from different accounts can affect how much tax you pay and how much of your Social Security is taxable.

If you would like to see how your retirement plan holds up with and without different benefit assumptions, contact our firm and we can run through the scenarios with you.