This week, RFA’s Director – Financial Planning, Gabe Adams, CFP®, MSPFP, discusses Social Security, including how the program is funded, its current state, and how your future benefits and financial plan could potentially be impacted.


Hi there, I’m Gabe Adams, the Director of Financial Planning at Reilly Financial Advisors. Social Security is an important program that provides benefits to tens of millions of Americans. However, the stability of the program, which was signed into law back in the 1930’s, has come into question. Today, I will discuss a few facts about Social Security, how the program is funded, the state of Social Security, and what this means for your benefits and your financial plan.

Some Key Facts About Social Security

Again, Social Security is an important benefit. In fact, it is the only source of retirement income for almost one-third of elderly Americans. For about one-half of elderly Americans, Social Security provides 50% of their income. The program touches about 75% of all Americans on a regular basis when considering the hundreds of millions of people that are either receiving benefits or paying into the system. At one-quarter of the US government budget, Social Security is truly immense.

Some Key Facts About Social Security

  • 33% of elderly Americans: Social Security is 100% of retirement income
  • 50% of elderly Americans: Social Security is 50% of retirement income
  • 65 million: the number of Americans who received Social Security benefits in 2020
  • 175 million: the number of American who paid into Social Security (via payroll taxes) in 2020

Source: The 2021 OASDI Trustees Report

How Social Security is Funded

Social Security is funded in a few ways, and most of that funding comes from payroll taxes. Primarily, employees and employers each pay 6.2% of their income in payroll taxes up to a wage base that adjusts each year for inflation. A smaller percentage of Social Security benefits are funded through a couple of other methods. These include interest earnings from the Social Security trust fund and taxation of benefits. All in all, revenue results in over $1.1 trillion in annual financing.

How Social Security is Funded

  • 2% payroll tax (for employees and employers up to $142,800 wage base in 2021) = $1.001 trillion funding 89.6% of benefits
  • Social Security trust fund interest earnings = $76 billion funding 6.8% of benefits
  • Social Security taxation of benefits = $41 billion funding 3.6% of benefits


The State of Social Security

As far as the State of Social Security, there are some legitimate longer-term concerns. First off, as baby boomers retire, the ratio of workers funding the program to the number of people drawing benefits will drop. This issue was accelerated as many people retired earlier than expected over the last year or so due to the pandemic. Additionally, longer life expectancies means that benefits must also need to be funded for longer. These issues could deplete the Social Security Trust fund over the next decade. If no changes are made, by 2033 there will be a funding deficit and only 76% of benefits would be covered. In their latest report, the Social Security Administration also projected farther out in the future. They projected that nearly 75% of benefits would be covered in 2095 with no changes to the current structure.

The Future State of Social Security

  • 2033 projection: 76% of benefits are covered if no changes are made
  • 2095 projection: 74% of benefits are covered if no changes are made

Source: The 2021 OASDI Trustees Report

What This Means for Your Benefits and You Financial Plan

A 25% cut in Social Security benefits clearly would not be a good development. However, there are potential solutions to improve the stability of the program. For instance, the wage base that is subject to payroll taxes, currently at $142,800, could be increased over time to improve funding. To account for longer life expectancies, the full retirement age could be raised for younger, future recipients with decades to prepare them. If we approach 2033 with no changes, the government can still borrow money or use money from another budget item to cover a shortfall until a long-term solution is reached. There is obviously gridlock and partisanship in Washington, but I would imagine that this issue, which affects tens of millions of Senior Citizens, would eventually be at the top of the agenda. After all, there was a similar issue in the early 1980’s which was solved through bipartisan legislation.

So, how should you approach the state of Social Security in your financial plan? If you are nearing retirement eligibility, develop a strategy that maximizes your lifetime benefits. I would advise against claiming benefits early because you feel you may not get your “fair share.” This could permanently reduce retirement income for you and your family. If you are already taking Social Security benefits, I would also advise against assuming that benefits are certain to be cut. Again, solutions to any issues may not be overly complex but may take some political will. Finally, if you are still far away from claiming Social Security, it is unrealistic to believe that the program will not exist when you retire. Remember, even with no changes, benefits are projected to be close to 75% covered in 2095! Build a reasonable assumption into your plan so that you can more accurately determine retirement income and savings needs. Your financial plan, including the state of Social Security, should be closely monitored over time and adjustments made as needed.

As always, if you have any questions, please do not hesitate to contact your advisor. Thanks so much for listening in, and I hope to see you next time!

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