Fact vs. Fiction: Social Security Edition

There’s no shortage of contradictory, confusing, misleading, and outright wrong information about investing and retirement planning.

Perhaps the best example of this involves one of the most important topics: Social Security.

Social Security is a key component of retirement plans for hundreds of millions of Americans. Given that, one might expect most Americans to be familiar with the program — what it is, what it isn’t, and what they can expect from it.

But that’s hardly the case. I dove into this topic in a recent video:

And I want to clear up some of the biggest misconceptions about Social Security now.

Myth: Social Security is designed to replace your pre-retirement income.

Reality: Social Security is designed to replace a portion of your pre-retirement income. In most cases, your monthly Social Security check will be 25% to 35% of your pre-retirement income. But that all depends on how long you worked and how much you made.

If you’d like to dive deeper here, you can take a deep dive into the calculation methodology.

Myth: Most Americans don’t even pay into Social Security, because they don’t pay any income taxes.

Reality: About 40% of U.S. households owed no federal income tax last year1. But income tax and Social Security taxes are different things. Taxes for Social Security and Medicare are withheld directly from your paycheck — in a line that typically appears as “FICA.” These taxes are calculated as a portion of gross wages — 6.2% paid by the employee and 6.2% paid by the employer — with no minimum earnings level.

In other words, anyone who gets a paycheck pays Social Security and Medicare taxes — even if they don’t make enough to owe federal income taxes. (If you’re a business owner, you’ll pay this via a “self employment tax” instead.)

Myth: Social Security is running out of cash, and benefit payments might go away.

Reality: OK, this one is a bit trickier. Social Security is not running out of cash. But it is facing a bleak financial picture, and it will not exist in its current form in a decade. That’s not a political statement; it’s a mathematical one.

Social Security benefit payments come from taxes collected via the aforementioned payroll tax. Historically, tax collections have outpaced benefit payments. The government did the smart thing with this surplus, setting it aside into a “rainy day fund.”

The situation has now flipped: benefit payments now exceed tax collections, which means that we’re dipping into that “rainy day fund” to cover the shortfall each year.

Unfortunately, that fund is being depleted very quickly. The shortfall for 2025 is estimated to be about $155 billion. That means that the reserves are being drained by about $424 million a day. That’s about $18 million an hour, $290,000 a minute, or nearly $5,000 a second. Yikes.

Myth: The Boomers ruined Social Security.

Reality: Social Security is in such poor financial shape for two primary reasons:

  1. Life expectancy has increased; and
  2. The birth rate has decreased.

In other words, people are living longer and having fewer kids. That means there are more retirees around to collect benefits and fewer young people entering the workforce to pay taxes.

I dive deeper into these trends in my recent video.

Myth: Fixing Social Security is a priority in Washington.

Reality: OK, this one is just my opinion. But I am skeptical that any “fix” for Social Security is going to come any time soon.

Politicians actually have plenty of levers in front of them — there are lots of ways to increase revenues and/or decrease costs. But they’re all bad options. They’re all going to upset a big part of the electorate.

Cutting benefits is going to anger retirees. I think that option is, practically, off the table.

Raising taxes — in the form of additional deductions from every millions of paychecks — is going to be tough to swallow at a time when rising prices are already pinching household budgets.

The current “crisis” in Social Security is nothing new. We’ve known about this looming issue for decades. And the response so far has been to kick the can down the road.

I expect that to continue for several more years. That’s unfortunate for investors, who will be forced to deal with the uncertainty.

More Reading

  1. I know… mind boggling, right? ↩︎
Michael Johnston, CFA
Michael Johnston, CFA

Michael Johnston, CFA is the co-founder and President at WealthChannel, and host of WealthChannel Academy.

Michael previously founded ETF Database, the leading independent authority on exchange-traded fund investing.

Michael's professional experience includes positions in corporate finance and investment banking, as well as entrepreneurial experience as a co-founder and early employee in multiple high growth, venture-backed companies.

Michael graduated from the University of Notre Dame with a degree in Finance. He lives in Oregon with his wife and son.