Will Social Security still be there when you retire?

The trustees of the Social Security trust fund report each year on the current and projected financial status of the program. In recent years, the analyses have not been encouraging, prompting concern among many that Social Security will not be a viable retirement income stream.

While there is good reason for this uncertainty, it is important to understand the full picture before writing off Social Security benefits altogether.

Social Security was never intended to be the sole source of an individual's retirement funding. When originally created in 1935 as part of as President Franklin D. Roosevelt's New Deal, Social Security benefits were designed to be used in combination with a retiree's pensions and other retirement savings.

Design flaw

The basic structure of Social Security, however, is problematic.

Today's workers pay for today's retirees' benefits through Federal Insurance Contributions Act, or FICA, taxes on wages. This payroll tax is a 6.2 percent levy from both the employer and employee.

The primary flaw with this model is that it assumes the current population will continue to exceed the previous one. In the program's early years, that was not an issue. The average worker-to-beneficiary ratio was approximately 41.9 workers per one beneficiary in 1945.

A 2010 analysis found a worker-to-beneficiary ratio of 2.9-to-1. By 2030, it is expected to drop to 2-to-1, falling below the 3-to-1 ratio at which Social Security is considered to be stable.

Dipping into the trust fund

This decline, absent other solutions, will require dipping into the Social Security trust fund to help fully cover future retiree benefits. Based on anticipated withdrawal needs, the trust is projected to "deplete" in 2037, at which point there will only be enough to cover approximately 76 percent of benefit obligations.

Many people misinterpret this to mean that 2037 will be the end of Social Security. Not so. Rather, this is when the trust will need to pay reduced benefits.

Even if the trust fund is completely exhausted, there will still be workers paying into the system. While those taxes certainly won't be enough to sustain 100 percent of benefit amounts, retirees will still get something.

Possible program adjustments

Congressional discussions have examined several ways to improve Social Security's outlook. Options include raising the amount worker's pay subject to FICA taxes, increasing retirement ages for collecting benefits, or lowering benefit payout amounts.

Some have even advocated eliminating Social Security altogether. I don't foresee that happening.

Instead, I suspect there will be a combination of the aforementioned adjustments, with a high probability of a reduction in the amount of benefits paid to future beneficiaries.

Current retirees are not likely to be affected by Social Security's funding issues or any potential solutions. Millennials and future generations, however, could be particularly impacted, making individual retirement savings even more essential.

Your wealth manager can help to determine appropriate saving strategies to insure your retirement goals are funded regardless of what your Social Security benefits turn out to be.