Social Security Plus Your 401(k): Partners in Retirement

The most common question we get from plan participants is whether social security will still be around for future retirees. We always say, unequivocally, Yes!

The reason is politics. Social Security is the major source of retirement funding in the US. More people rely on it than on anything else. Stopping Social Security, or even reducing its benefits, would guarantee a politician would not be reelected. That is why it isn’t going away.

Which brings us to the next most popular question: How will Social Security still be there if it is going bankrupt? Social Security is running out of money, true. But that doesn’t mean it always will. Social Security today pays out more in benefits than what it receives in taxes. Since Social Security started there was always more income than the benefits that were paid out. The surplus grew every year until 2010.

In 2010, for the first time, the amount of taxes taken in was smaller than the amount of benefits paid out. So the Trust Fund shrank. Because there are so many people retiring, and not enough workers coming into the workforce to make up the difference, the size of the Social Security Trust Fund is now getting smaller every year.

There is a big debate among actuaries and economists about when the trust fund will run out of money. Some say as early as 2025, some as late as 2037. But there is no debate that given current laws the Social Security Trust Fund will run out of money within the next 20 years – unless something changes.

And something will change. For example, you can be certain that payroll taxes will increase. Currently you contribute 6.2% out of your pay to Social Security. Your employer matches that amount for a total contribution of 12.4%. Once your compensation exceeds $127,200 that contribution stops. That means the most that any person can put into the Social Security System is $15,773 in a year.

There are two ways that contribution can be increased. The payroll tax can go from 12.4% to 14.4%. In this manner everyone puts more money into Social Security. Another way is for the contribution limit to be increased: say from $127,200 to $250,000. In this manner wealthier employees put in more money. Either of these changes could allow Social Security to have enough funds for the future.

So how will Social Security be there when you retire? There is going to be an increase in the payroll tax, in some manner, over the next ten years. That change, and other potential tweaks, will insure that the Social Security Trust fund always has enough money to pay out benefits.

When you plan for retirement, it is prudent and wise to include Social Security. But remember, you will probably need at least twice what your Social Security benefit will be to retire comfortably. That is where your 401(k) becomes so important.

Think about this: You and your employer are currently putting 12.4% of your income into Social Security. Since you need to match your social security payment in retirement out of your own savings, shouldn’t you consider matching your Social Security contribution when you are working? It’s a new year. Have you increased your 401(k) contribution?