In a word: Never.
It’s been an amazing thing to watch. We’re living in a global pandemic and experiencing a wild economic showdown. Daily news is crazy. One topic that caught my attention was the speed at which the media started covering the pending demise of Social Security. I can’t count how many times I’ve been asked, “When is Social Security going bankrupt?” in the last couple of months.
My frustration level has been increasing. I’ve seen even the most seasoned journalists spout off that this incredibly important social insurance program is going bankrupt. It just isn’t. Unless we have exactly zero workers in the US. That would be an unemployment rate of 100%. That’s ridiculous!
What’s behind all the hoopla?
To be fair, the retirement industry, financial services firms, and the media have correctly identified some issues with Social Security. Specifically, the Reserve Account is going to be tapped this year. The Reserve Account is essentially a savings account. It holds the surplus between the incoming payroll taxes and the outgoing benefit checks.
About 90% of people who work do so in “covered employment.” That means their employer must pay FICA taxes on their behalf. You’ve noticed that 6.2% coming out of your salary every pay period? Well, that’s going right into the Social Security Trust Fund along with another 6.2% match from your employer. FICA taxes from all of us workers fund 88% of current beneficiaries’ payments.
But this year, for the first time since 1982, some of the “savings account” will be used to pay retirees. Together, both payroll taxes and using some of the Reserve Account will allow Social Security to meet 100% of current retirees’ benefits. (Yep, I’m talking to you, Mom and Dad!)
The Reserve Account is a rainy day fund and it’s needed right now to meet payments.
However, the way these so-called expert groups have chosen to position the situation causes great alarm. Most people are scared into thinking Social Security is going bankrupt. But it’s not. It is a social insurance program for our old age. A social safety net. It’s designed for the long run.
As I’ve written before, Social Security is solvent. It is not going bankrupt. One post highlighted why it’s here to stay. The other on what would happen if your own benefit disappeared. Spoiler alert: almost 100% of us would not have sufficient money for retirement.
So the concerns most future retirees have stem from a complete misunderstanding of how Social Security gets funded. And a poor choice of words. By definition “bankruptcy” is “a legal proceeding involving a person or business that is unable to repay their outstanding debts.”
But, in fact, Social Security is on track to meet most of its obligations for the next 75 years. Even if the Reserve Account is completely used up, beneficiaries will continue to be paid. Their checks could be about 22% less. But, they will still get a check.
Workers will continue to fund the overall Trust Fund, which acts like a big “checking account.” Therefore, plenty of money will continue coming in. Just not enough for 100% of the outgoing demand.
We need to stop scaring people into thinking that Social Security is going bankrupt. Words really do matter.
A new article in Retirement Daily
Thanks to a wonderful editor and friend, I’ve been asked to contribute guest articles to Retirement Daily on a recurring basis. Retirement Daily is one of the publications at The Street. I submitted an article in May for publication. I hope you’ll read it! It’s a more in-depth analysis of the current situation: “Social Security is Not Going Bankrupt.”
Overall, my biggest concern is that individual people, especially those closer to retirement, think they won’t get their money. They are aggressively planning for when Social Security is going bankrupt. Because they fear losing out on their Social Security benefit, they make poor claiming decisions. Add in unemployment and great economic uncertainty and we have a recipe for personal financial disaster in retirement. Not to mention a locked in and permanently reduced income stream for their entire retirement.
Excitement on Twitter
You may know that I love Twitter. It’s my social media channel of choice. It’s chock-full of entertainment and information all in one or two sentences. Whenever I have an article published, the editor pushes it out on their social media and then I do the same. The more readers the better.
Well, my article created a bit of a rutkus. I heard from some very highly-regarded people on Twitter. They did not care for my positioning that “Social Security is a sturdier program than you may think.” One Tweeter is a very prominent professor at Wharton. The other an equally distinguished professor at University of Illinois. I couldn’t believe it! This was big. So, despite their differences of opinion, I thanked them both for reading my article!
In the end, we had more in common than they initially thought. Sometimes a mere headline can cause concern. Hmmmmm. They agreed that using the word “bankrupt” should be stopped. And, the media should stop scaring unsuspecting near-retirees. It was a very exciting exchange of tweets!
Follow me on Twitter (@MarciaMantell) to read the back and forth.