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An estimated 45% of Americans aren’t confident that Social Security will be there for them in retirement, according to a 2023 study by Northwestern Mutual.

It’s not difficult to understand why. Social Security is the largest single expense of the US government, while the budget deficit has continued on a clear trend upward over the past decade. With an increasing ratio of old to young people, higher interest rates, and the idea of a balanced budget seemingly a dream that was lost with the failed Balanced Budget Amendment of President Reagan’s day.

What are the chances there will be anything left for young people 30, 50 or even 75 years from now?

The Trust Fund Will Deplete

According to the 2024 Annual Report of the Board of Trustees which oversees Social Security, the OASI (Old Age and Survivors Insurance) Trust Fund is estimated to deplete by the year 2035.

At that point, the government will fully depend on income from taxes to meet their obligations to American retirees. Of course, with the trust fund depleted, Social Security payments will constitute a larger percentage of overall government revenues from tax.

Because the government continues to run deficits, though, greater deficits mean one of three things: 1) they will need higher growth in the economy to increase tax payments 2) they will need to raise taxes in such a way that it doesn’t cancel out the benefits by hurting economic growth or 3) sell US Treasuries (take on new debt).

What this doesn’t mean, though, is that Social Security simply disappears. There’s no need to worry that it won’t be there at all for future generations. Depleting the trust fund doesn’t stop the tax revenue from continuing to come in.

But it does mean that changes will need to be made to the program.

What Can Be Done to Save Social Security?

The Board of Trustees looks at a 75-year projection for Social Security and makes the following conclusions.

In order for retirees to receive 100% of their stated Social Security from now through the year 2098, the FICA tax revenue would need to increase.

Presently, the full FICA tax is 12.4%. Half is paid by the employer and half by the employee. Self-employed individuals pay the full 12.4%. This tax rate would need to rise by about 3.33%, bringing the total to 15.78%.

For employees, that would mean an increase in FICA tax payments from 6.2% to 7.89%.

Considering an average US salary of $60,000, that’s an extra tax of just over $1,000.

If taxes are not increased, the other option is a reduction in benefits.

The estimated benefits for future Social Security payments are about 75% of what they would have been in the past. This assumes that anyone currently receiving Social Security payments continues to receive what was promised.

There is also the choice of simply making retirees wait longer to receive their full promised payment. Perhaps they could still receive 75% of the agreed payment at age 67 but could receive the full amount if they waited to begin payments until age 70.

Of course, the Board also points out that there could be a compromise among these alternatives.

The Transitionary Period

The US is going through a transitionary period which will eventually become more balanced.

Because of the Baby Boom from 1946-1964, followed by declining birth rates ever since, we are in a unique stretch of time of mismatch between working-age individuals supporting retired individuals.

This mismatch will not last forever. So long as the birth rate stabilizes, as it is projected to settle around 1.9 by the year 2040, this greater consistency should help the Social Security program.

Although Social Security payments will gradually require larger percentages of the tax revenue, eventually they will stabilize if the birth rate does not significantly decline from here onward.

That stabilization between incoming tax revenue and outgoing payments is projected to happen around 2080.

What Does This Mean For You?

The good news here is that Social Security will not just disappear.

While it’s impossible to say with certainty what the benefits will be to our younger generations, we can see that there are actions that can be taken to save (or mostly save) the Social Security program.

But we need to elect politicians who are serious about deciding on a solution.

No one wants to pay more in taxes.

No one wants to delay their Social Security payments.

No one wants to take a cut in their Social Security benefits.

The problem is that at least one of these three things is going to happen. So we are going to need to determine how to balance everyone’s interests with the fact that change must be made.

The cold hard reality is that the government has irresponsibly ignored this issue for too long. But there’s still time to save it.

For your retirement, a reasonably conservative estimate would be to assume you receive 75% of your stated benefit (which you can find at My Social Security).

And this means that we are going to have to pick up the slack of the irresponsible politicians and choose among our options: 1) save more money, 2) have more children, 3) elect politicians who are serious about ensuring Social Security’s solvency, 4) massively improve worker productivity through such tools as AI or 5) some combination of all four!

Conclusion

Social Security is not going anywhere.

But in the end, someone is going to have to foot the bill.

Compromises will need to be made. Everyone will have to do their part and make sacrifices.

In short, we as Americans will have to shoulder greater responsibility to save for our futures.

The average monthly payment for Social Security, as of 2024, was about $1,900 per person. This of course differs depending on how much each individual paid into Social Security during their working life.

But quick math says that 75% of $1,900 is $1,425, meaning that future retirees might want to plan on making up that nearly $500 average difference. With inflation, however, that average difference might be twice that in 40 years from now.

The math says:

$1,000/month extra x 12 months = $12,000/year

At a 5% rate of withdrawal from retirement funds:

$12,000/year = 5% of $240,000

An extra $240,000 in retirement funds is not a small number. But if we’re going to face the truth and be prepared for it, then it’s better we know earlier rather than later.

If you’re just getting started in your career, here’s an easier way to swallow this number.

If you save an extra $1,000 per year during a 40-year career and invest it at an average return of 8% annually, then in 40 years this would have grown to over $240,000. Of course, you’ll want more than just this in retirement, but that will make up approximately the difference if Social Security benefits end up being reduced.

Let’s hope our politicians can be more responsible in the future. In the meantime, we’ll take up the responsibility like our pre-1940 ancestors before us.