No, Social Security does not go bankrupt – Forbes Advisor


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Somewhere along the way, everyone started to believe that Social Security was doomed.

A recent example, a 2021 survey by Nationwide, found that about four in five Millennials and Gen Xers fear Social Security will run out of funding in their lifetime. Even a majority of baby boomers, many of whom are already receiving checks, fear that they will no longer receive monthly payments in the future. In the same data, nearly half of Millennials said they thought they wouldn’t get a dime from the Social Security benefits they earned.

Fortunately, these concerns are wrong: Social Security doesn’t go bankrupt, and Millennials will live to get many benefit checks when they finally retire. This should be heartwarming news because, if history is any guide, Social Security will likely be the most important source of retirement income when today’s workers hang up their spurs.

“There are so many common misconceptions that the depletion of the trust fund is synonymous with bankruptcy,” said Catherine Collison, executive director of the Transamerica Center for Retirement Studies. “It is not true.”

Here’s what you need to know about the confusion surrounding Social Security’s much-reported demise, and how you can reduce that noise to position yourself for a comfortable retirement.

Why People Think Social Security Will Be Bankrupt

So why does this social security myth persist? One of the reasons may be the way the popular press covers Social Security news, using the name of the program as a shorthand for its trusts.

Note: The Social Security Administrative Council recently issued a press release for its annual report on the long-term finances of Social Security trust funds. The headline read “Combined Trust Fund Depletion Forecast One Year Earlier Than Last Year”.

Specifically, the report said the Old Age and Survivors Insurance Trust Fund (OASI), which helps pay benefits for current retirees (among other eligible Americans), was due to run out in 2033, a year ahead of schedule. Last year.

Yet in a Tweeter on their report writing, the New York Times began “Social Security will run out in 2033 …”

But, of course, social security will not run out in 2033; it is simply the OASI Trust Fund that will be. And if that happened, retirees would still receive 76% of their benefits. This is because your monthly check is paid by current workers’ payroll taxes as well as by the trust.

In other words, as long as there are Americans to work (and pay taxes), Social Security will continue to pay benefits, even if they are somewhat reduced from current levels.

This might not be the message you see in the headlines, but it is important because …

Social security is crucial for your retirement

It’s almost impossible to overstate how essential Social Security is to your long-term finances.

Here are some examples :

Considering how integral the old age pension program is to all Americans, whether they are currently retirees or future retirees, you would think that Millennials would revolt in the streets, demanding a solution before the eldest child died. ‘them won’t start claiming benefits in about two decades.

Instead, workers seem to believe that Social Security will simply disappear. That they have no control over the situation. Let them resign themselves to a poorer future.

This type of attitude is detrimental to your long term wealth.

To best position yourself to meet your financial needs, you must believe that you are in control of your destiny, that your actions matter, Sarah Asebedo, assistant professor at Texas Tech University, told Forbes Advisor.

This so-called financial self-efficacy is a big part of financial literacy: knowledge is not enough. You must also believe that your actions will work to your advantage.

The problem with the catastrophic future of Social Security is that it can create a negative feedback loop. If this essential program will eventually disappear, taking away much of your wealth, what’s the point of saving more now when you will never have enough savings for later anyway? Why not just spend your savings on things that will bring you immediate joy?

A clear understanding of social security issues can therefore encourage you to save more now.

What you can do about the pending Social Security trust fund gap

Of course, politicians will have to tackle the problem, either through benefit cuts or tax increases. Evidence suggests Americans may prefer the latter.

In a 2019 Aegon retirement readiness survey, respondents from various countries were asked how their governments could close a social security deficit. The most popular response from the United States was to increase funding (32%), followed by a balanced approach of some benefit reduction as well as tax increases (21%). Simply reduce the benefits surveyed to just 18%.

Either way, Congress has proved adept in recent years to convene on bipartisan pension legislation. A few years ago, it passed the Secure Act which, among other things, removed the age limit for contributing to traditional individual retirement accounts (IRAs) and raised the age at which you must start receiving the minimum required distributions. (RMD).

Now Congress is considering a sequel, the Secure Act 2.0, which would extend automatic enrollment to employer-sponsored plans and improve saver credit that rewards low-income Americans who contribute to retirement plans, among other measures. .

Maybe calm heads can come together to shore up Social Security long term finances as well.

“It’s a huge call to action and should be a priority now,” Collison said.

You, on the other hand, probably don’t have a vote in Congress. But there are still steps you can take now to help protect your Club Med days.

For example, you might want to work with a financial advisor to run various emergency scenarios and test your potential retirement income in the event that Congress fails to act. Use the fear-mongering headlines to propel yourself and save an extra percentage point or two of your paycheck in a 401 (k) or IRA. Or at least go to the Social Security website and get a realistic estimate of what you’re entitled to.

No, Social Security is not going bankrupt. But there is still more you can do to better fund your golden years. That way, you’re ready for a fulfilling retirement no matter what Social Security pays.

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