Will Social Security go "bust" before I can collect my retirement benefits?



For decades the media has been telling us that Social Security is going broke. Millions of Americans are counting on Social Security to help pay for living expenses during retirement, so this is obviously a great fear. Is there any truth to the warnings about Social Security going under?

The 2009 Social Security Trustees Report forecasts that Social Security benefits paid to retirees will exceed Social Security taxes paid in by workers (and earnings on the funds in the trust) beginning in 2016. In addition, the trust fund could be drawn down by 2037.

Most likely we will see reforms such as raising the retirement age, raising the wage limit that Social Security taxes are paid on, and lower benefits for future retirees (it's less likely that people already collecting benefits will see their benefits decreased.

How much can I expect to receive?

It's essential to know how much income you will have from different sources, including Social Security, after you retire. For some people Social Security is their only retirement income; for others it's a small part of their retirement, as they will have pensions and investment income in addition to Social Security. Whatever your situation is, you need to have a good understanding of how much income you will receive from all sources so you can adequately plan for your retirement years.

Your retirement benefits will vary based on a number of factors, such as the age you retire, how much you earned during your working years, and how much you contributed to Social Security (some government employees do not contribute to Social Security and therefore may not be eligible for benefits).

Generally, your top 35 years of earnings are averaged (and indexed for inflation) to calculate your retirement benefits. The formula is more complex than that, but that's the basic premise. Once your benefit is calculated, it is reduced by up to 25% for people who retire before they reach full retirement age, and increased by 8% per year for people who wait until after they reach full retirement age to start collecting benefits.

To estimate your benefits, you can use the retirement benefit calculators at the IRS website.

When should I apply for Social Security?

The question that most people ask first regarding Social Security is "when should I start collecting benefits?" By now, you're aware that you will receive lower benefits if you apply for Social Security before your full retirement age. The question is, are you better off applying early and receiving benefits for more years, or are you better off waiting until age 66 or later to apply?

How can I maximize my retirement benefits?

Your parents and grandparents probably never considered how they could maximize their Social Security income, but you should. Because it's a lifetime income, and because it is increased each year for inflation, Social Security is much more valuable than most people understand. There is nothing wrong with using the Social Security rules to your advantage.

Will Social Security be enough?

The purpose of Social Security was never to support someone completely during retirement. It was created to supplement other income sources (pensions and annuities) as well as your retirement portfolio. So you should not expect Social Security to fund your entire retirement. For the average person, Social Security makes up about 40% of income received during retirement.