Since the Social Security Act was signed into law in 1935, millions of Americans have come to rely on Social Security benefits as income during retirement. Some workers are only able to retire because Social Security benefits supplement the retirement savings they’ve accrued during their time in the workforce. Many retirees face the tough reality of their retirement funds still not being enough to live comfortably, even when coupled with Social Security benefits. While we’d like to think this reality is a temporary impact of the hit many investment funds took during the Great Recession, projections and data indicate the opposite. 

Social Security 401(k) small business

There have been increasingly regular news reports questioning the future viability of Social Security. The truth is that if the current system endures, Social Security benefits will be reduced by around 25% beginning in 2032. This possibility presents an even bigger need for business owners or employees with decades left before retirement to establish a long-term 401(k) savings strategy in the present. 

“Social Security benefits will be reduced by around 25% beginning in 2032.1

How Social Security Works

While employed, every American pays a Social Security tax. These taxes are put into a fund that is used to disperse benefits to people through Social Security checks when they reach retirement age.

When more funds are collected in taxes than are disbursed through benefits, the surplus is put into the Social Security Trust Fund, where it is invested in special bonds issued by the U.S. Treasury. The bonds pay interest, putting the surplus to work to create a greater nest egg for the whole population.

Is Social Security Really Running Out?

There’s been talk of Social Security running out, and many people fear that they are paying taxes into a system that won’t support them when they need it. This fear becomes more potent as individuals get closer to retirement and need to have an adequate nest egg. Many might be wondering how they can compensate in savings on their end to match the possible lack of Social Security.

So, are Social Security benefits really going to run out? The short answer is not exactly—but the long answer provides us with a disturbing potential that our workforce must anticipate even while legislators strategize to try and avoid it.

What everyone actually needs to be concerned about is the livelihood of the Social Security Trust Fund. If you looked at its balance sheets today you would find this fund is larger than ever. But with the large Baby Boomer generation transitioning into retirement, the trust fund is only anticipated to last through 2032 before it is completely exhausted. 

“Unless something is changed, the incoming tax funds are only projected to cover 75% of the program’s obligations in benefit disbursements after 2032.”1

As it stands, when the Trust Fund is depleted due to the high volume of Boomer retirees, all that will be left is the incoming funds from tax collection. Though the census report released in April 2016 showed that there are now more living Millennials than Baby Boomers, the incoming annual funds from income taxes alone won’t be enough to match the current benefits retirees draw from both income taxes and the Trust Fund. Further, with more retirees every year, the likelihood of a surplus of taxes to invest back into the Trust Fund is slim.

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Source: Social Security Online

How This Affects You and Your Employees

In short, those planning to retire after 2032 are expected to receive just 75% of the Social Security benefit that today’s retirees draw. Because Social Security is a large part of retirement planning, this means that many of today’s workers may want to anticipate this shortage and plan to compensate for the difference with savings. While pending legislative changes to how people can draw Social Security may mean more of the Trust Fund remains available for future retirees, the only true guarantee any worker has is the one they give themselves through savings. 

As an employer, you’re in a position to put together the right kinds of retirement plan options to appeal to your current employees, as well as future ones, and offer them a manageable, hopeful retirement, even in the face of possible uncertainty when it comes to Social Security.

1 https://www.ssa.gov/OACT/TR/2018/index.html