Why Social Security Isn’t Going Bankrupt

The Social Security program will begin running out of money by 2020, according to a new government report released this week.

At that point, the program’s costs will exceed its income from payroll taxes for the first time since 1982, and it will have to start tapping a reserve fund. Congress will have to act to make some changes to the way program is funded, or the reserve fund will be depleted in 16 years, and payments to retirees will start to get smaller, according to reports.

In related news, the Medicare trust fund is expected to be depleted by 2026, the same year that was predicted last year, barring action from Congress.

Although the two programs face financing challenges, they aren’t in danger of shutting down. Read on and we’ll explain what’s going on.

What are Social Security and Medicare?

Social Security is an 84-year-old federal program that provides monthly income during retirement. The program sends checks to 62 million people each month. It’s funded primarily through payroll taxes. It currently has a reserve fund of about $3 trillion.

Medicare is the government-run health insurance program that covers 60 million people, primarily retired, for care ranging from hospitalization to prescription drugs. It’s financed through a payroll tax and premiums paid by recipients.

Both programs are managed as trust funds, funded by income tax and other revenue.

Why are the trust funds running out of money?

Expenses for the programs are rising slightly, and tax revenues are lower than forecasts, according to reports.

The tax cut legislation approved at the end of 2017 will result in less revenue for government programs, and is expected to increase the annual deficit and the national debt.

Is Social Security going bankrupt?

No. The program isn’t ending, but it does face important funding challenges. If Congress does nothing, the program will still be able to make nearly 80% of its payments through 2090, according to AARP. In 1982, the last time Social Security faced a similar funding problem, Congress increased the full retirement age to 67 years old, from 65.

Congress is already debating plans that could increase payroll taxes to continue funding the program at current levels.

What can you do?

People can save for their own retirements via a variety of accounts, including workplace plans such as 401(k)s, self-directed individual retirement accounts, or IRAs and Roth IRAs.

It’s important to start saving for your own retirement now.

Americans have a hard time saving, in general. Multiple reports suggest that the average family only has $1,000 in savings. And average retirement savings for working families is about $95,000.

If you’re making about $40,000 a year now, you’d need to save about $1.18 million to have the same standard of living in retirement, according to AARP.

The average payout from Social Security is $16,464 annually, or about $1,372 per month, according to reports. For most people, that’s not nearly enough to fund a retirement. In fact, the average retired family, defined as a household headed by someone 65 years old and over, spends about $45,756 annually.

Meanwhile, the rising cost of healthcare is likely to take up half of Social Security income by 2030, according to a report from the Kaiser Family Foundation.