The Future of Social Security
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Are you worried about Social Security? If so, you’re not alone. According to a recent Gallup poll, 60% of non-retired individuals doubt that Social Security will be able to pay them a benefit when they retire.
Not surprisingly, pessimism is inversely correlated with age. Ask those in the 55+ age bracket and only 26% doubt Social Security will make good on its obligation. But ask those int the 18-34 age bracket, and the number skyrockets to 76%. This pattern isn’t terribly surprising, but it’s interesting nonetheless.
At the same time, 56% of current retirees think that they will eventually see their benefits cut. Just five years ago, only 32% of retirees anticipated a reduction in benefits. That’s quite a change.
Running on fumes
We’ve heard for years that the Social Security system will eventually start paying out more than it takes in. However, this wasn’t supposed to happen until at least 2016. Well… Guess what? Thanks to the recent economic downturn, the timeline has been shortened to this year.
That’s right. According to an article in the NY Times earlier this year, the bleak job market has resulted in more people applying for benefits sooner than expected while revenue because there are fewer paychecks available to tax.
This isn’t to say that the Social Security Administration (SSA) will be unable to meet their near-term obligations, but it’s only a matter of time before they go broke unless something changes.
No news is… troubling?
That NY Times article alluded to the SSA’s forthcoming annual report, which was expected to provide insight into the true financial condition of the system. This report is supposed to be published by April 1st each year, but this year’s report has been postponed indefinitely.
According to Forbes, the stated reason for the delay is to provide more time to account for the effects of the recent Healthcare Reform legislation.
One possibility is that the new legislation will cause employers to substitute higher taxable wages in place of employee health insurance coverage. Likewise, employers that offer so-called “Cadillac” health plans might trim benefits in favor of higher wages. Both scenarios would boost tax revenues and help balance the books.
While this sounds like a plausible excuse, rumors are swirling that the truth is that the Feds are just buying time while they try to figure out how to put a positive spin on what may be a very bleak report.
Fixing the system
So… What about the future?
My personal view is that Congress will do whatever it takes to keep Social Security unchanged for as long as possible. It’s just too popular, and politicians are too self-interested to rock the boat.
Of course, eventually something will have to give. As always, proposals for “fixing” the Social Security system include tax increases, benefit reductions, and delayed eligibility. The longer we wait, the bigger the changes will have to be.
My best guess is that any future reform will involve some combination of all three as opposed to somehow re-inventing the system. But will these things be enough to stave off a collapse?
Published on July 21st, 2010 - 6 Comments
Filed under: Retirement, Taxes
About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!
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July 21st, 2010 at 8:12 am
Well put Nickel. I do hope our Congress can keep Social Security around b/c Pensions really do help the unprepared and disadvantaged.
If you are a 76%’er like myself, get on with saving and prepare like the SSA will vaporize. If you get a reduced benefit, at age 80. Then lucky you!
Else take pride in you funded your own retirement through: savings, employer sponsored plans, and investments (R/E, etc..).
July 21st, 2010 at 12:33 pm
I wish there was a way I could opt of of this “welfare program.” I received my SS stmt in the mail last month – it made me sick to see the cumulative amount that has been taken out of my paychecks over my short career. It’s disgusting! I’m only 33 and do not expect to receive ANYthing from it when I retire – and have built our retirement savings plan based on the assumption that we will get nothing from SS – ever. This program did what it needed to do when it was set up, now it needs to be nixed! People need to take a little personal responsibility and stop relying on gov’t to fund the lifestyles they can’t afford. Too bad no one in gov’t has the balls to do what NEEDS to be done.
OK mini-rant over
July 21st, 2010 at 1:03 pm
The SSA Trust Fund can’t ‘go broke’ because there is no money in there anyway. Today’s benefits are always paid by taxes collect today. Any surplus tax is put into the general spending fund and has already been spent. Something like $3 trillion in IOUs have been added to the SSA Trust Fund for taxes collected and ‘lent’ to the federal government for spending on non-Social Security things.
The federal government can’t pay for it’s current spending, let alone an increasing cost for SSA benefits. Now that SSA is getting to the point of spending more in benefits than they are collecting in SSA payroll taxes, the Federal Deficit is going to grow exponentially.
The only hope here is for the federal government to drastically cut spending AND increase income taxes. For the ‘conservatives’ that fight tax increases — all you are doing is pushing YOUR problem to a younger generation. For the ‘liberals’ who refuse to cut spending — you are the other side to the same coin.
Both spending must decrease, and taxes must increase — no other way around it.
July 21st, 2010 at 1:28 pm
Sad but true. One of the biggest reasons, of course, is the ever-increasing life expectancy while the system stays static. I agree completely–unless something changes, how can we expect this to be sustainable?
Politics aside, we need to change the system by either putting more money in (higher taxes, oh joy) or taking less money out (higher retirement age, lower benefits, etc.).
Unless, of course, someone comes up with a brilliant idea…and there are already many out there.
July 21st, 2010 at 2:25 pm
#4 Wojo) My brilliant idea is an across the board tax increase.
The SS-trust fund is owe’d $3 trillion by the federal government / all tax-payers.
Social-Security, if looked at in isolation, is actually solvent for another 30-40 years. It has collected a surplus of taxes since its inception and has a $3 trillion war-chest of excess funds — so no drastic changes to social security really need to be made (at least for 30-40 years).
But we all know that the fed can’t pay back the $3 trillion, so who are we going to screw? If we reduce benefits for SS, then retirees are screwed royally. They paid the tax, and an overly excessive amount on top of that (the surpluses), just to have their benefits crushed.
These are the types of games you must play when we’ve gone so long without a balanced budget. Back in the 90’s we had a PAY-GO policy that required the budget to be flat (no new spending without a cut somewhere else, or an increase in taxes to pay for the new spending).
To fix this mess, we need to:
Step #1: stop the bleeding by reinstating PAY-GO.
Step #2: figure out how to pay the massive federal debt off (including the IOUs to the SS-trust fund). Either by reducing spending (and keeping taxes the same), or increase taxes drastically.
But we can’t even do Step #1, with the previous administration or under the new one. Something is going to blow if this problem is not addressed.
July 21st, 2010 at 3:28 pm
Politicians will put off fixing it until they absolutely have to and then they’ll fix it.
The future of Social Security is based on economic forecast for the entire nation projected over several decades. Anyone really put a lot of stock in that?? Seriously? Social Security was predicted in 2009 to be solvent till 2039. 13 years ago in 1997 they thought it would only last till 2029. So in 13 years the prediction moved forward 10 years. And thats even including the recent horrible recession. Hmmm. In another 13 years will it move forward another 10 years?
Even if nothing is changed and the prediction is accurate it will still be able to pay about 70% or so of current benefit levels with no increases in taxes or change in retirement age.
If they make a couple tweaks to the system (increase tax / increase retirement age) then social security will be solvent indefinitely. Of course that will eventually change 50 or 100 years from now.
This isn’t unprecedented either. They raised SS tax rates 10-20 times over the decades. It was in imminent jeopardy of bankruptcy in the early 80’s and they averted disaster then.