2034 is the year Social Security benefits will “run out”. The Social Security Program is funded by taxing our income and supporting us in old age with monthly payouts. It is a BIG problem if the Social Security Program cannot support us. If you are born after 1972, then you and generations of people may be significantly unprepared for retirement and will even have to work in old age to support themselves.

What exactly is Social Security? Well, it is a government program to fund our retirement with the taxes we pay during our working years. There is a 12.4% Social Security tax for each paycheck we get. Usually we pay half of the tax (6.2%) and our employers pay the other half.

According to the Social Security Administration, full retirement age is 67 and the earliest retirement age is 62.  If we choose to retire between 62 to 66 then we will receive a portion of our monthly payout. This makes sense since the Social Security Program would have to support you for the additional years.

Our Social Security payout can range anywhere between $0 - $3,041/month. The $0 is for those who don’t work the minimum of 10 years to qualify for Social Security. The $3,041 is for those lucky enough to earn the maximum taxable amount of $128,400 for 35 years. According to US News, the average Social Security payout in June 2018 is $1,413.37/month.

Calculating your Social Security payout at a young age can be confusing and complex. In 2018, our payout is calculated with the highest earning 35 years of our careers. If a person worked less than 35 years, then $0 will be substituted for those years. Luckily for us, the Social Security Administration has provided a calculator for us.

Now that we have an understanding of how Social Security works, we can dive in the year 2034. According to the Population Reference Bureau, the U.S. population is living longer and fertility rates are declining. This means there are less people capable of paying taxes to the Social Security Program.

The fertility rate has decreased since 2007 and will likely continue to decrease. When the fertility rate is two, there are two children replacing two parents and the U.S. population is not decreasing or increasing. When it is less than two, there is one child replacing two parents and the U.S. population is decreasing.

The U.S. population is getting older, which means we will have to support more people with social security. This trend is expected to continue as fertility rates go down.

The elderly support ratio is the key metric we want to consider.

“It measures the number of working-age adults ages 18 to 64 for every person age 65 or older. it is projected to drop to only 2.8 by 2030.”

This is an alarming statement from the Population Reference Bureau because it illustrates the main issue with the Social Security Program. There will not be enough working adults paying the Social Security tax for retired persons.

The Social Security Administration has predicted the depletion of funds and going forward, will be unable to pay out full benefits in 2034. What exactly does this mean? The 2018 statement released by the Social Security Administration is dense and not meant for the layman. We can break it down together.

After the depletion of reserves, continuing tax income would be sufficient to pay 79 percent of scheduled benefits in 2034 and 74 percent in 2092.

This is the most important line released by the Social Security Administration and will affect generations of people. In 2034, the administration will run out of money. Remember the Social Security tax? The incoming tax money will be used to pay for those benefits, which will be significantly less.

For example, if the average person is receiving $1,413.37/month then after 2034, they will receive $1116.56/monthly ($1,413.37 * 79%). Not great, we just lost a fifth of our payout. Is this the future of Social Security payouts? It is right now, unless lawmakers take action.

In our old age, it would be near impossible to live on $13,398.72/year ($1,413.37 *12). We need to and can do more to prepare for retirement. Below are a few steps we can do to prepare:

1) Sign up for a Social Security Administration Account - estimates your Social Security payout and salary history
2) Follow the Simple Guide to Investing for Retirement - provides exposure to
retirement and investing concepts

If you would like to request a specific topic you want to learn more about, please let me know in the comments section below or email me at alan@tomoonfund.com!


Cover Image: unsplash-logoCody Davis

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