From the very first time I learned about the existence of Social Security, one thing was made abundantly clear… Social Security IS.
Social Security’s doomed status has been the fodder of news anchors and cable pundits for so long that many people don’t even question it.
As a result, many young Americans are starting to worry whether we’ll ever see a dime of the taxes we pay into it.
And this fear isn’t unique to America.
There are billions of people that are paying into similar programs all over the world from From Albania to Zimbabwe.
And when people’s future income is messed with, bad things can happen.
Remember the riots in Greece a few years ago?
So is Social Security an income source we should count on in retirement?
Or should we just kiss those dollars goodbye and hope our grandparents enjoy it while they can?
The earliest reported beneficiary of the Social Security retirement benefit was a Mr. Ernest Ackerman.
A retired motorman from Ohio, Ernest applied for a one-time lump sum benefit of seventeen cents the day after the Social Security program began.
Considering he only paid five cents in to the system during that single day, I’d say he made out alright!
In the decades since, the program has expanded to touch more American’s lives than any other government program, with one hundred sixty nine million people paying in and sixty one million receiving benefits.
Instead of the lump-sum payment Ernest and his peers received, the program promises retirees an income for as long as they live, presuming they paid in long enough.
In 2019, the average Social Security retirement benefit is 1,461 dollars per month.
The maximum benefit you can collect is 2,861 dollars a month.
And in order to receive any credit, you’re required to earn at least 1,360 dollars per quarter for 40 quarters, aka 10 years.
With so many lives and dollars on the line, it’s no wonder that people tend to panic when they hear reports that the Social Security Trust Fund is set to run out of money.
According to the Trustees Report, funds for retirement benefits are currently set to be depleted in the year 2034.
So was your Uncle Jim right all along when he blamed that president he doesn’t like for stealing the funds from our retirement?
Are we all going to end up eating cat food in our golden years?
That is highly unlikely.
For starters, Social Security was designed to be a pay-as-you-go system.
That means current-workers’ tax payments go to pay current retirees.
This is different than something like a corporate pension.
Company pensions go into a big investment pool and need to be funded in advance just in case the company later goes out of business.
But in 1984 President Reagan made some big changes that resulted in the program bringing in more money than it paid out, and this excess stockpiled into what became known as the Social Security Trust Fund.
One of the most popular myths surrounding Social Security is the belief that somebody — Congress, George Bush, Barack Obama — raided the coffers of this fund.
This is a false statement.
The nearly three trillion dollar surplus that the Trust Fund accumulated over the past three decades hasn’t been stolen, raided, or pilfered.
It’s been invested.
Rather than earn 0% interest on your retirement savings, the Trustees decided to invest in special issue bonds from the treasury, which earn an average interest of 2.9% per year.
Bonds are technically a form of ‘borrowing’, but it’s a long way from the Federal Government pillaging your retirement.
So why are so many people worried about the future of Social Security?
Well, Americans are living longer and having fewer children.
Right now 14% of the population is over 65.
By the year 2080, that number will grow to 23%.
That means more people drawing from the system and fewer people paying in.
The year 2018 was the first time in 34 years that the program actually paid more out than it took in.
That can only go on for so long.
The Trustees currently predict the Fund to be completely empty by 2034.
So what happens if nothing changes by then?
Is it back to the cat food?
Thankfully, the whole system doesn’t crumble once the Trust Fund runs out of money.
That’s because the system is still primarily pay-as-you-go, and current taxes will be able to take care of most of the benefits.
Retirees would continue to get benefits, but they would have to be reduced.
Taxes from those future workers will only be able to cover 79% of retirees benefits when the money runs dry.
While that’s not awesome, it’s nice to know that if we don’t make any changes, you can still count on a check, it’ll just be 20-25% reduced by the time you retire.
The good news is that we still have 15 years to create a solution to rising life expectancies and lower birth rates.
There are several possible paths to “fixing” the shortfall.
The simplest (and inevitable outcome if we don’t find a better way) is to reduce benefits to match income from payroll taxes.
Simple, yes, but most folks don’t want their retirement check cut after a lifetime of paying into the system.
A second option would be to simply increase what tax-payers pay into the system.
The current Social Security tax is 12.4% (half of which is paid by you, and half by your employer).
And income above $128,900 dollars is not taxed for Social Security at all.
Lawmakers could increase the percentage paid in or raise the limit where social security taxes phase out.
Surprisingly, voters seem open to doing this; 77% of people say raising taxes is worth it in order to preserve social security for future generations.
Cutting entitlements and raising taxes tends to make your average lawmaker sweat a little bit.
So another solution that avoids both would be to raise the age of “retirement” for younger workers.
The “full retirement age” was originally 62 when the program began, and has since been raised to 67 for anyone born after 1960.
We’re living longer, so it might make sense for retirement checks to begin later.
We could also reduce or eliminate the benefit for wealthy Americans.
After all, why would the ultra-rich need a social security check?
Or we could simply abolish the whole government program and privatize retirement plans, making workers completely responsible for their own retirement.
But considering the frighteningly low savings rates of Americans, that seems like a stretch.
8 in 10 Americans believe that Social Security is good for the country and nearly 9 in 10 say it’s now more important than ever.
It affects more people than any other federal program, and has one of the highest favorability ratings.
It’s nice to know that even if lawmakers can’t agree on any of these solutions, we can still rely on at least a portion of our benefits when we’re flossing to Drake in the old folks home.
And that’s our two cents!