If you’ve spent any time playing around with retirement calculators while reading about the shaky finances of the nation’s entitlement programs, you may be wondering: how much should I actually expect to receive from Social Security? The answer, especially if you were born after 1968, is that you should expect to receive 20% less than whatever the Social Security Administration says are your projected benefits.
The Social Security system works differently than is often popularly assumed. Instead of paying into an account that’s there for you when you retire, the payroll taxes you and your employer pay during your working years are actually being used to finance current retirees. For decades, the Social Security system took in more money than were required to pay out benefits, and the federal government used the surplus revenue to finance other government priorities, leaving “IOUs” to the Social Security system.
In 2010, however, Social Security started paying out more than it was collecting in taxes. In the coming decades, Social Security will have to claim those IOUs to pay out full benefits, but by 2035, the program’s actuaries recently predicted, those IOUs are expected to be spent. At that point, under current law, the system will only be allowed to pay out what it collects in taxes, which at that point is only expected to be 80% of promised benefits. That would translate into a 20% cut in Social Security benefits.
The full retirement age is gradually moving up and will reach 67 by 2035, meaning retirees born starting in 1968 will be most directly affected by this change. However, the necessary cuts would also affect people born prior to that date. It’s just that people born prior to that date would have already had some years of getting their full promised benefits.
To be sure, it’s perfectly possible, perhaps even likely, that before we get to this point the federal government will cut some sort of deal to raise taxes or alter the law, allowing for full benefits to be paid out. But given the long-term outlook for the rest of the budget, and the raft of proposals coming from Democratic candidates, it’s unclear what sort of fiscal agility the government would have. You also don’t know what kind of changes to the system may be made by that time, and how they might affect your individual benefits.
Like all aspects of retirement planning, the future of the Social Security system is subject to uncertainty. So as with anything, it comes down to how you want to balance out risk. It’s possible you may decide to take the chance and assume future lawmakers will make whatever changes are needed to fully fund Social Security. But if you want to be more conservative in your retirement planning, you should assume at least a 20% cut, and if you’re wrong, worst case scenario is that you have a more comfortable retirement.
For those who are unaware, you can estimate your expected benefits at with this tool the Social Security Administration’s website.
