For decades, I’ve heard about how our Social Security program is a Ponzi scheme, that it’s bankrupt, and that it will run out of money.
The program collects revenue from taxes on current workers earnings, from taxes on the benefit paid to current recipients, and from interest on almost $3 trillion in the Social Security trust fund.
According to the 2020 Social Security Trustee report, the trust fund will be drawn to zero by 2034, at which point the program will collect approximately 75% of scheduled benefits.
So, instead of running out of money, the program could see a 25% haircut in 13 years.
Personally, I find that very unlikely. The program is very popular, and politicians know that.
There are various ways to reform the program to cover the promised payments. To name a few, we could raise taxes, change the benefit calculation formula, or tax income above the current ceiling of $142,800.
All of these would involve political trade-offs that are nearly impossible to predict more than 10 years out.
Finally, and quite possibly, we may deplete the trust fund and continue in a system where the shortfall is covered through the general budget, which could involve further borrowing.
To be safe, if you’re younger than 55 and among the higher earners, I think it’s prudent to allow for the possibility that you either may not receive the full benefit as currently projected or may be taxed at a higher rate.
However, it’s not a matter of not receiving any benefits. That seems extremely unlikely.
As with all planning going far into the future, give yourself a margin of error, as the future likely won’t play out exactly the way we expect.
Jorgen Vik is a certified financial planner and partner with SKV Group LLC.