Should you be counting on Social Security as part of your retirement plan?

Since Social Security first rolled out, in 1935, millions of Americans have counted on this steady stream of monthly income as part of their retirement plan. Combined with a pension or IRA distribution, Americans have become dependent on Social Security to cover the costs of ever-increasing expenses.

A new report, however, is casting doubt on whether betting on the viability of Social Security is a good bet.

A report released by Social Security’s trustees said that by 2034 both trust funds would be depleted. Additionally, the report stated that Social Security would need to dip into its trust fund this year to fully fund the program. It’s the first time since 1982 that Social Security has had to use trust fund assets.

Social Security is largely funded by the government collecting payroll taxes. These taxes are then used to pay the monthly benefit of millions of retired American workers. As the American workforce grows, and more taxes are collected, Social Security is strengthened. But if the workforce declines, and less taxes are collected, Social Security is threatened.

The most recent jobs report by the Bureau of Labor and Statistics, says that workforce participation is strong. Jobs are being created and unemployment is down. This bodes well for Social Security.

However, tax cuts passed at the end of 2017 have cut into Social Security tax revenues. And though Social Security recipients received a 2% cost of living adjustment for 2018, it is likely that smaller increases will be issued in coming years. Combine these factors with a massive shift towards retirement for Baby Boomers (10,000 people per day for the next 13 years); and it means making Social Security a major part of your retirement planning could be a bad decision.

Let’s clear one thing up now. Even if the Social Security trust funds are depleted, it does not mean Social Security will end. It simply means the level of benefits issued each month will be reduced. As long as a strong American workforce exists, taxes will be paid, and Social Security will continue. The level of benefits, however, will be reduced.

How can you plan for changes to Social Security?

When I discuss Social Security with my financial planning clients I always prepare them for the worst-case scenario. If they are not currently receiving Social Security we build in less than their estimated benefit and a .5% cost of living adjustment annually. This is in keeping with reports that say if the Social Security trust funds are depleted, monthly benefits would only be approximately 78% of the estimated benefit.

When planning for a 20-25 year retirement, it is more practical to plan for less income from Social Security and be pleasantly surprised if its more.

Planning for less from Social Security will require saving more. If your estimated benefit is $2,000 per month, but you are planning for $1,500, you will need to save an additional $6,000 per year above and beyond what you are already saving in order to offset the difference.

If you are not in a position to save more, you can also reduce the amount you expect to spend during retirement. Perhaps you expected to spend $4,000 during retirement (assuming you have no mortgage, car payments, or other major debts). You could reduce this amount to $3,500 to offset the reduced Social Security benefit.

How could Social Security change in the future?

There’s no doubt that something has to change. With 10,000 Baby Boomers retiring every day for the next 13 years, our already strained system will get more strained as people begin taking their benefits. Not only will these workers begin taking their benefits, but they will stop contributing to the system through payroll taxes when they retire. This means less money going in, and more money coming out.

One way Social Security could change in the future is how cost of living adjustments are granted. Presently, everyone receiving Social Security receives the same cost of living adjustment. In the future, however, it is possible that cost of living adjustments could be merit based.

A merit based cost of living adjustment would mean those with pensions, or large IRA’s that go on cruises and maintain a vacation house may not receive a cost of living adjustment. Those struggling to pay for their medication would be the first to receive a cost of living adjustment.

One thing is clear: change is coming. Preparing for changes through proper financial planning can help prepare you for the changes and minimize the impact of changes.