I was talking to a friend of mine the other day. He's in his late 40s and pretty burned out as a result of his high-stress career.
But a big reason he's sticking with his higher paying job, even though he's itching to leave it, is to try to boost his nest egg substantially while he can. And he's motivated to do that because, as he put it, "It's not like Social Security's going to be around in the future."
Now on the one hand, I almost didn't want to correct him because I happen to think it's a good thing that he's so inspired to save for retirement on his own. But I felt compelled to let him know that the future of Social Security isn't quite as dire as he and many other people like him might think it is.
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Benefits aren't going away
It's true that Social Security is facing a major financial shortfall. In the coming years, as baby boomers exit the workforce and fewer workers come in to replace them, Social Security's primary source of revenue, payroll taxes, is apt to shrink.
Social Security can tap its trust funds in the coming years to keep up with scheduled benefits as its revenue from payroll taxes declines. But once those trust funds run dry, benefit cuts will be on the table.
And unfortunately, according to recent projections, we're only about 10 years away from Social Security's trust funds running out of money. But to be clear, it's not like we're 10 years from Social Security running out of money.
Because the program is funded by payroll taxes, money will continue to flow in -- just perhaps at a lower rate than what's needed to keep up with benefits in full. As such, it's really incorrect to say that Social Security is going bankrupt, or that benefits will not be around for today's workers once they retire.
Rather, it's that workers today may get stuck with a smaller benefit than what they'd otherwise be entitled to. But that's not the same thing as getting no money from Social Security at all.
It's still a very good thing to save
Some people take the opposite approach as my friend -- they save almost nothing for retirement with the plan to fall back on Social Security. That's really not a smart idea, because even if Social Security cuts don't happen, those benefits are only designed to replace about 40% of the typical worker's pre-retirement wages. And most people end up needing a lot more income than that in retirement.
At the same time, it's not necessarily the best idea to go to the other extreme and assume that Social Security won't be around at all in a matter of years. That, frankly, might put undue stress on a lot of people, my friend included.
In fact, I expressly told my friend that since he's already saved quite a lot of money, and since he can look forward to some amount of income from Social Security, that he should consider switching to a less stressful job for the sake of his mental and physical health. If he puts less pressure on himself to fund his retirement savings, he can afford the reduction in pay and perhaps enjoy a better quality of life.
