Social Security Choices

Will Social Security be there for You?

Social Security is a program provided by the Federal government so it is always possible that the law may change. Many articles have been written about how the Social Security system is in financial trouble.

We do not have a crystal ball which will tell us how the system will be modified to bring taxes and benefits into balance. We can, however, quote from the 2009 trustee's report:

Projected long run program costs are not sustainable under current program parameters. Deficits will be made up by redeeming trust fund assets until reserves are exhausted in 2037, at which point tax income would be sufficient to pay about three fourths of scheduled benefits through 2083. The financial challenges facing Social Security need to be addressed soon.

Social Security could be brought into actuarial balance over the next 75 years with changes equivalent to an immediate 16 percent increase in the payroll tax (from a rate of 12.4 percent to 14.4 percent) or an immediate reduction in benefits of 13 percent or some combination of the two. Ensuring that the system remains solvent on a sustainable basis beyond the next 75 years would require larger changes because increasing longevity will result in people receiving benefits for ever longer periods of retirement.

While a 13% fall in Social Security benefits would be a very large reduction (which we believe is unlikely), it would still be smaller than the 18% fall in the S&P 500 index over the year from September 2008 to September 2009. (If we had calculated the fall in the S&P 500 index from March 2008 to March 2009, it would have been far worse.)

Even if Social Security benefits fell by 13%, these would still be an important part of your retirement income. The benefits are inflation protected, and therefore they rise with inflation. This table compares annualized returns to the Vanguard 500 Stock Market Index fund which opened in 1976 to increases in Social Security benefits over the same period ending in September 2009.

Annualized Returns to the Vanguard 500 Stock Market Index Fund Versus Increases in Social Security Benefits
Vanguard Index Fund Average Annual Increase in Social Security Benefits
Since 1976 10.28% 3.8%
10 years -0.86% 2.6%
5 years 0.41% 1.9%
1 year -18.21 0%

While Social Security is, in many ways, more secure than other forms of savings, the possibilities of future reductions in Social Security benefits should be taken into account when thinking about when to start taking Social Security. Delaying the start of your benefits will make you more vulnerable to possible reductions in your benefits.

Since we cannot project what these changes will be, our calculations are based on the present benefit structure. We include this warning in our reports if you order a report from us.