Will Social Security Live To See 80?

By Greg McFarlane | December 19, 2011 AAA
Will Social Security Live To See 80?

Ben Franklin's most enduring axiom states that only death and taxes are inevitable. The byproduct of the two, Social Security, might not be. Social Security, officially the Old-Age, Survivors and Disability Insurance program, was founded in 1935. Like many political disasters, Social Security began with the best of intentions. President Franklin Roosevelt created it to guarantee workers incomes once they retired. The rationale, if unspoken, was straightforward: private citizens couldn't be trusted to save for retirement, so a forced savings plan administered by bureaucrats would do it for them.

TUTORIAL: Retirement Planning

Not Just Retirement Benefits
People identify the phrase "Social Security" with retirement benefits, but the federal administration devoted to it also encompasses unemployment benefits, Medicare, Medicaid, Temporary Assistance for Needy Families, even ObamaCare. Add it all up, and Social Security is the greatest expenditure in the world. You've read how the United States' military budget is larger than that of many of the next countries on the list combined? Social Security is bigger still, accounting for 21 cents of every dollar the federal government spends. (For related reading on Social Security, see Introduction To Social Security.)

The principle behind Social Security was that the feds would take a few dollars from everyone's paycheck, promising to pay it back once you reached retirement age. The workforce was big, and the number of old people small, so everyone assumed the program could continue indefinitely.

A current presidential candidate recently referred to Social Security as a "Ponzi scheme," a comment he was lambasted for. His words might have been jarring, but that didn't make them false: the people who comprised the first generation of Social Security recipients got paid by a greater number of people in the second generation, who got paid by a greater number of people in the third generation, and ... it'll collapse before we make it to a fourth.

It's not that previous generations necessarily dipped too deeply into the Social Security pool, but rather that no one bothered to put any actuaries on the case. In 1935, the life expectancy of the average American woman was about 64 years; that of the average man, 60. Today, overall life expectancy is around 78, and the Social Security Administration pays out benefits beginning at age 62. Long story short, no one in 1935 imagined (or is on record as imagining) that one day Social Security would cover 16 full years of supplementary income. Maybe penicillin wasn't such a great discovery after all.

The number of Social Security beneficiaries has progressed steadily over the last few years, an additional 600,000 or so being added to the rolls annually since the mid-90s. That will change dramatically once the baby boomers start retiring en masse. The baby boom's long-form title is "Post-World War II baby boom," and the war ended in September of 1945. Add nine months and a full working life to that date, and you can see that we're approaching critical mass. The rate of increase in the number of recipients is rapidly outpacing that of the number of future contributors. (For related reading, see Top 10 Investments For Baby Boomers.)

Social Security's first recipient illustrated the point. Ida Fuller of Ludlow, Vermont paid into the system for three years before retiring in 1939. She contributed a total of $24.75. Which, as we all know, was big money in those days. Ida lived to be 100. She received $22,888.92.

Furthermore, she was one of only 175,000 or so recipients at the time. There were dozens of workers available to keep Ida comfortable. Today, there's a workforce of 145 million people - most of whom aren't exactly bragging about how well they're doing financially - indirectly supporting over 50 million Social Security beneficiaries. The ratio is less than three to one, and it lowers every year.

Take a good look at your next paycheck. There's an item called "FICA deductions," which refers to the Federal Insurance Contributions Act. You pay 6.2% of your salary in Social Security taxes, another 1.45% for Medicare. Even that's an accounting fiction, as your employer pays similar amounts on your wages before you even receive your checks.

One administration can defer the problem to the next one. It's been done before. The government can increase the slice of your income that goes to FICA - it was originally 3%. They can raise the retirement age (done). If it comes down to it, they can always print more money and create hyperinflation.

President George W. Bush attempted to restructure Social Security so that people could manage their accounts themselves. His idea was decried by people who assumed that what happened to the worst-managed companies on Wall Street must happen to the U.S. economy as a whole. (For related reading, see Top 6 Myths About Social Security Benefits.)

Just a few years later, obligations are growing so fast that Barack Obama will be the last president with the option of passing the buck to his successor. After that, time and demographics won't permit the system to do anything but implode. Either beneficiaries won't receive what they were promised, stoking a political inferno, or benefactors will be forced to cough up so much of their earnings that it almost won't be worth it to be employed, creating an even more fiery scenario. Either way, it can't stay as is much longer.

The Bottom Line
The takeaway is that you can't rely on anyone, least of all a government program that's outlived its usefulness, to keep you fat and happy in your dotage. All the more reason to browse the compendium of information that is the Investopedia archives, and learn the basics of investing for yourself.

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