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Can young people still count on Social Security?

September 12, 2021, 10:00 AM UTC

Every year the Social Security Administration releases a report detailing the financial condition of the Social Security program. Americans have a vested interest in its financial condition because for many households, Social Security plays a huge role in their financial well-being.

In 2020, 65 million people received Social Security payments and upwards of 175 million people paid payroll taxes into this program. The Center on Budget and Policy Priorities estimates nearly one-third of all elderly Americans rely exclusively on Social Security to fund their retirement. Ten million Americans have been lifted out of poverty simply by receiving their Social Security check. Roughly half of all senior citizens in this country get at least 50% of their retirement income from Social Security.

To say this is an important program would be an understatement. In fact, Social Security is the largest line item in the U.S. government’s budget, making up roughly one-quarter of annual spending by the federal government.

So it may have come as a shock to some people that this year’s report claims Social Security will now be depleted one year earlier than previously estimated. The report stated by 2033 there will no longer be enough money coming in to fully cover the payouts. One of the biggest reasons for this is there were close to a million more people who retired last year due to the pandemic. That means more people taking Social Security payments early, in many instances.

Taken at face value, this sounds like awful news. I’m not worried though. Here are a few reasons why:

There is still money available

From 1974 to 2008, there were between 3.2 to 3.4 workers paying taxes into the system for every one retiree receiving Social Security benefits. By the mid-2030s, when the bulk of the baby boomer generation will be retired, that number will dwindle to more like 2.3 workers for every retired person. When you consider the fact that people are living longer than ever before, this will obviously put more of a strain on the system.

But that doesn’t mean there will be no money left. In fact, the SSA projects by 2033 that taxes will still cover more than three-quarters of the payouts.

That could mean one of two things:

(1) The government will have to cut Social Security benefits.

(2) The government will have to find that money somewhere else.

When you think of the millions of people that are impacted in a positive way by this program, could you really see any politician in their right mind cutting benefits for people?

The government cannot run out of money

If 2020 has taught us anything about the United States government, it’s that the federal budget is nothing like a household budget. The government can literally print money out of thin air with a push of a button (or to be more specific, the creation of a Treasury bond). The government is not constrained by some line in the sand when it comes to debt.

Inflation is always a worry when it comes to government spending, but the government in 2033 can simply take that money from another budget line item or borrow more money to make the Social Security system whole. There is no reason for government officials to cut back on Social Security if they don’t want to.

There are simple fixes to make Social Security more secure

Beyond adding to our fiscal deficit, there are a number of simple fixes that would put Social Security on better financial footing. Your Social Security payout is calculated based on how much money you earn over the course of your career and the age at which you begin taking benefits.

Knowing that people are living longer, the government could always increase the retirement age for younger people. Officials could also take the cap off the amount of income that is eligible for Social Security taxes. Additionally, they could change the cost-of-living adjustment for those receiving benefits in the future.

There are a number of levers the government could pull that would alleviate some of the strain Social Security causes on the federal budget. It all comes down to the political will to make those changes.

There are no promises when it comes to the U.S. government. We cannot predict what politicians or voters will do in the future. But Social Security is not some Ponzi scheme that is going to be insolvent anytime soon.

If you’re a young person, you may assume you’ll never see a dime of Social Security money. I don’t believe that for a second.

The authors of the most recent report even took their calculations out to the year 2095. At that point, they estimate payroll taxes should still be able to cover 74% of payouts to Social Security recipients.

This program is not as well funded as it once was, but Social Security will be just fine for many decades to come.

Certain of the securities mentioned in the article may be currently held, have been held, or may be held in the future in the personal portfolio or a portfolio managed by Ritholtz Wealth Management.

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