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Social Security: Myth vs. Reality

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It's no secret that Social Security isn't in the best financial shape, but it's not broke or bankrupt like many people would have you believe. The Social Security Board of Trustees recently released its 2016 report on the financial status of the program, now and in the future, so here are the facts you need to know -- and what we can do to fix the problem.

Don't believe the lies

It's a common myth that Social Security is broke, or is going to be bankrupt in the near future, and many people (including some of the news media) perpetuate this fallacy. I even saw one news story claiming that the U.S. government admitted Social Security is going bankrupt and that it would lead to a "collapse" since many Americans haven't saved much for retirement.

While it's true that Social Security isn't sustainable in its current form, it's still nearly two decades away from potentially running into serious financial trouble. And though it's true that many Americans have done a poor job of saving, even if Social Security did run out of money, it wouldn't leave retirees without any income.

The true financial state of Social Security

Let's be perfectly clear: Social Security has money in the bank, and a good amount of it. Throughout its 80-year history, Social Security has collected about $19 trillion, and has paid out $16.1 trillion as of the end of 2015. Subtracting those two numbers shows that Social Security had over $2.8 trillion in reserves at that time.

And, for the time being, the program is taking in more money that it's paying out. In fact, Social Security's income is projected to exceed the program's costs through 2019; 2015's surplus was about $23 billion.

The bad news is that it's not expected to last. Social Security takes in money in two primary ways: payroll taxes and interest earned on its reserves. Excluding interest, there is actually expected to be a deficit going forward, averaging $69 billion per year through 2019 and rising sharply after that. Beginning in 2020, Social Security will need to tap into its reserves in order to meet its obligations to retirees, and this is expected to result in complete depletion of the trust fund in 2034.

So Social Security won't run into serious trouble for almost two decades. After 2034, retirees won't stop getting checks. In fact, the incoming payroll taxes will still be enough to cover about three-quarters of promised benefits.

So, as a worst-case scenario, retirees would see a 25% pay cut from Social Security beginning in 2034.

What can be done, and what will be done?

I say this would be a worst-case scenario because it's unlikely to happen exactly this way. History tells us that Congress will do something to fix the shortfall, and there are several ways it can be done. However, most of the possible solutions fall into one of two categories: tax increases or benefit reductions.

As far as tax increases go, this can take the form of an across-the-board increase on the payroll tax, which is currently 6.2% for both employers and employees. Or, Congress could decide to raise or eliminate the cap on taxable earnings, which currently sits at $118,500.

Across-the-board benefit reductions are so unpopular on both sides of the political spectrum that they're unlikely to gain serious traction, but there are other ways to cut benefits. For example, benefits could be cut for high-income retirees, or the number of working years used to determine benefits could be increased.

According to one in-depth study, any form of benefit reduction would be quite unpopular among the American people. Tax increases, on the other hand, would receive widespread support if they translated into retirement security. In fact, 83% of participants were in favor of increasing the payroll tax to 7.2% and 80% favor eliminating the earnings cap. These figures include a majority in all income groups, age groups, and political parties.

The bottom line is that Social Security will need some changes before you can be 100% confident that your full retirement benefit will be there for as long as you need it, but it's not time to panic just yet.

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