The 1935 Social Security Act created a mechanism for retirees to receive some financial support from the federal government. The Act set the full-benefit retirement age at 65. At the time, life expectancy was around 61 years. From inception, Social Security was intended as a supplement to people’s retirement savings. It was never meant to be a full-fledged retirement plan.
The term Social Security actually refers to two legally distinct plans: The Old-Age and Survivors Insurance (OASI) Trust Fund, which pays retirement and survivor benefits, and the Disability Insurance (DI) Trust Fund, which pays disability benefits.
Social Security benefits are available to most American workers, with the exception of some state and local government employees. Currently, those who work and pay Social Security taxes can earn credits toward Social Security benefits. A total of 40 credits are required to qualify for retirement benefits. This is equivalent to working and contributing for at least 10 years. Generally, the more you contribute, and the longer you contribute, the more you are eligible to receive in retirement years—subject to a cap.
Each year, the Social Security Administration (SSA) announces its annual cost-of-living adjustment (COLA). Annual cost-of-living adjustments are based on the change in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). These annual adjustments are meant to ensure benefits increase commensurate with inflation. It is noteworthy that some argue the CPI-W is the wrong consumer price index measure for social security, and that we should instead use the CPI-E, which represents the prices of goods that are more relevant for retiree spending, including higher health care costs.
The currently advertised maximum monthly benefit amounts, which are around $4,000 per month, are not sufficient to maintain a middle-income lifestyle. Many workers are eligible for significantly less. According to AARP, “the estimated average Social Security retirement benefit in 2020 is $1,503 a month. The average disability benefit is $1,258.”
Thanks to various advances, many of them in medicine, human life expectancy has increased dramatically. The increases for both men and women have been so pronounced that Congress legislated gradual increases to the full-benefit retirement age from 65 to 67.
With increased life expectancies and the baby boomer retirement wave, the Social Security program’s ability to pay benefits to retirees will increasingly become strained. As noted in the earlier Precarious Pillars section, the latest numbers show that the combined funds will be depleted by 2035. At that point they will be insolvent, as the amount collected from actively employed people is forecast to be only 80% of the amount claimed by retirees and disabled people.
It’s unlikely the Social Security program will be scrapped entirely. More likely outcomes include reduced benefits, on the order of around 80% of promised amounts, or higher tax rates to help replenish the fund. It’s also conceivable that high-earners will be refused benefits. Most physicians fit into the high-earner category compared to the general population. It’s likely that reduction or refusal of benefits would meet with time-consuming legal battles, and raising taxes will involve pitched political battles. The sooner the government addresses the issue the better, as that will allow smoother transitions and more time for everyone to plan for upcoming changes.
The safest approach for those who have enough other income is to ignore any expected Social Security benefits during retirement planning.
This is not practical for many workers who desperately rely on Social Security benefits to make ends meet. But if you can afford to ignore it—you’ll be better prepared. The logic is obvious: if you ignore Social Security in your planning and the program is severely cut back, your financial plans and retirement will not suffer. If Social Security survives, that added income will be a welcome bonus. The alternative—relying on Social Security only to see it collapse—is a bad strategic move.
While I recommend omitting future Social Security income from your formal retirement planning, if the program survives you will need to make some decisions relating to Social Security benefits, including when you wish to begin receiving them.
The Social Security website has a lot of useful information, including a variety of calculators to: determine eligibility for retirement benefits, estimate your life expectancy, and forecast your retirement or disability benefits.
Next, we turn our attention to the account types through which we may save for retirement.