Will Social Security Run Out Before I Retire?

Many misunderstand the details of social security. A lot of young people do not expect social security to be around when they retire. Most of the uncertainty and fear about social security comes from not understanding the history or the financials. The situation is not hopeless, and with a little understanding we will be able to make the needed fixes to enable social security to benefit my generation and generations to come.

History of Social Security

social-security-cardSocial Security started during the Great Depression of the 1930’s. The poverty level of senior citizens was believed to be over 50% after the effects of the great depression. The administration of Franklin D. Roosevelt instituted a “social insurance” program to help much of the desolate aging population.  The program was never meant to be “quid pro quo” but rather a progressive system. Those that max out the social security salary tax ($110,000 in 2012) will not get what they paid into the system, while those at lower income levels will get more than what they put into the system.

There are at least three factors that strain the social security program. First, the system was built with the assumption that there would be a specific ratio between the number of workers paying into the system verses those that are taking from the system.  Back in the 1940’s and 1950’s the ratio between workers and retirees was around 8 to 1. Today (2012) the ratio is around 3 to 1 and expected to approach 2 to 1 during the height of the baby boomers reaching retirement age.

worker-retire-ratio

Chart source http://www.ssa.gov/policy/docs/chartbooks/fast_facts/2012/fast_facts12.pdf

Second, we are living longer thanks to advances in modern medicine.  Third, during 2010 and 2011 the social security payroll tax was reduced from 6.2% to 4.2%. These strains on the social security program will cause a collapse in the system unless something is modified.

social-security-2001-2011

The Future of Social Security

If we continue on this route the social security program will slowly continue to pay out more than it brings in. Even if employment rates raise and the payroll tax resets back to 6.2% in 2013, it still will not be enough to fix the system. The only way to really fix the system will be to make a larger change to the current social security program. These changes could include increasing the retirement age, decreasing the amount paid out, or increasing the tax collected for social security.

The problem is that changing social security is a political hot button. When a politician comes around and says you are going to get less benefit or going to have to pay more taxes – no one likes it. But the truth is, something has to change or the system is not solvent. The CBO (Congressional Budget Office) predicts that the trust fund, which is the surplus of taxes collected over the years, will run out making up the shortfalls around 2032 and then the system will only be able to pay out about 75% of benefits.

So hopefully the next time someone says I don’t expect social security to be around when I retire you can say, well it will be, but you will only get 75% of your promised benefits unless we do something about it!

 

 
tiffA Mom Knows Contributor

About Tiff

Passions in my life include: Family, Vacations, Reading, God, Financial Planning, and Technology. I stay at home with my 4 lovely children who keep me running from one end of town to the other.

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