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Social Security: Will It Stay or Will It Go?
You might have been told to be aggressive in your savings as much as possible, because your full social security benefit may not be there when you retire.
But what does that mean for you? If you’re an older investor, there is a decent chance you will get your full benefits. But if you’re an investor in your 30s or 40s, how do you factor social security benefits into your retirement plans? Should you assume there will be only a reduced benefit when you get to your golden years?
First, we’ll tell you how to get your estimated monthly social security benefit amount. Create an account at www.ssa.gov where you can see your estimated monthly benefit, which is based on your actual earnings history. This estimated benefit might seem very low, but you should know that the estimates assume you'll continue to work and make about the same amount as you did the last couple of years every year until you retire. Also, they don't factor in inflation. The estimates are more helpful the closer to the retirement you get.
Second, let’s help younger savers get a more accurate picture of what their retirement benefit will be when they retire. Based on the trustees' report, social security will have solvency through 2034. But that doesn't mean that social security will go bankrupt in 2034, since social security after 2034 will still have payroll tax dollars. However, the trust fund will be gone.
Assuming that nothing changes, the administration will still be able to pay out social security benefits--but it will be at a reduced rate of 79%, because that's what payroll tax dollars will cover. However, there are a plenty of levers available to Congress to stimulate social security, rather than cutting benefits radically (you can imagine, no representative wants to go back to his or her district, and tell voters above a certain age that they will get a reduced benefit going forward). So we think the Congress is more likely to adjust the amount of income that's subject to social security, or increase the full retirement age.
Many financial advisors recommend taking the conservative tack of assuming a reduced benefit. After all, it's better to be safe than sorry with retirement savings, since there are no loans available to fund retirement. If you’re under 45, we suggest using a one-third deduction in the benefit amount you can find on ssa.gov.
The other thing you should be aware of is that your benefit amount increases, the later you retire. If you retire at the age of 70, rather than the standard age (67), your expected benefit may be up to 40% higher than your standard benefit. Also, if you retire five years early (at the age of 62), your estimated benefit may be 30-40% lower than your benefit at the standard retirement age.
The bottom line is, social security is not a Ponzi scheme that’s going away before you retire. It is an open and transparent system; its trustees send a very detailed actuarial report to Congress that projects the program's finances 75 years into the future. It's irresponsible to suggest that the program is an unethical fraud or swindle. However, if you’re a younger individual, below 45, it’s reasonable to assume that some of the benefit will go away by the time you retire. If you want to be conservative with your planning, you should assume you will receive two-thirds of the suggested benefit on ssa.gov.