This is a guest post from Robert Brokamp of The Motley Fool. Robert is a Certified Financial Planner and the adviser for The Motley Fool’s Rule Your Retirement service. He contributes one new article to Get Rich Slowly every two weeks.
We hear a lot about the doubts over the future of Social Security. Here are a few I’ve come across:
- “Three-fourths of those 18 to 34 don’t expect to get a Social Security check when they retire.” — USA Today
- “My husband and I are both 28, and we laugh every time we hear [‘yes, you’ll receive Social Security’]. No, we won’t receive Social Security, even though we’ve both been paying into it since we were teenagers…I can’t think of one of my peers who expects Social Security to still be around when we’re retirement age. Call us bitter.” — A comment to my last column (“When Will You Be Able to Retire?”)
- “Six in 10 Americans who have not yet retired believe they will get no Social Security benefits when they retire, more pessimistic than at any time since Gallup began asking this question in 1989.” — Gallup
- “According to one survey, 100% of people married to Robert Brokamp wish he would shave his head rather than try to pull off a comb-over.” — My wife
If you’re among the doubters (of Social Security, not my hairdo), then listen up: The following paragraph is the most important group of words you’ll ever hear regarding Social Security. It’s key to understanding how the program works, and whether you’ll get anything. Here it is:
Social Security is predominantly a pay-as-you-go program. Most of the payroll taxes that are collected from today’s workers go into the checks of today’s beneficiaries. Thus, as long as there are people working and paying payroll taxes, there will be money to pay Social Security benefits.
According to the most recent Social Security Trustees report, from 2037 to 2084 payroll taxes will be enough to cover 75% of projected benefits. That’s not great, but that’s not nothing, either.
People who think that they won’t receive any Social Security benefits must believe one or all of the following three things:
- In the future, people won’t work.
- In the future, the government won’t collect payroll — a.k.a. FICA (Federal Insurance Contribution Act) — taxes. Currently, workers “contribute” 6.2% of their paychecks to the Social Security system, and their employers match with another 6.2%; the self-employed pay the whole 12.4%. Another 2.9% goes toward Medicare. As you know if you’ve looked at your paycheck, it’s a separate withholding from income taxes. In fact, the majority of Americans pay more in FICA taxes than they do in income taxes.
- In the future, Social Security will be means-tested to such a degree that the “wealthy” (an arbitrary designation, to be sure) won’t receive any benefits. Those who don’t think they’ll receive Social Security assume they’ll be among these “wealthy.”
I don’t think Nos. 1 and 2 are likely. No. 3 is possible. The program is already means-tested to a degree, since the percentage of income that is replaced by Social Security decreases as lifetime earnings increase. However, I think that if changes to the means-testing formula result in a group losing their benefits completely, it will be a small group — certainly not 60% to 75%, as the aforementioned surveys suggest. I find it very unlikely that a future Congress — elected by future citizens — will change the program in a way that the majority of people who pay FICA taxes won’t get at least some benefits.
Those crazy trust funds
For many years, the payroll taxes collected were more than needed to pay current benefits. The surplus went into the Social Security trust fund, which invested the money in special-issue U.S. Treasury bonds. However, this year — thanks to the stinky economy — benefits will exceed revenues. That’s projected to temporarily reverse, but at some point in the middle of the next decade, the retirement of the baby boomers will cause benefits to exceed taxes. This is where the trust funds come in. They’ll be sold to cover the shortfall.
In my opinion, this is the essence of questions about the future of Social Security: What, exactly, are we to make of these trust funds? Are they truly assets? Here are the two arguments:
- Those who think that the Social Security system is essentially sound will point out that of course the trust funds are real assets. They’re full of U.S. Treasuries, which are considered the safest investments in the world.
- Those who think otherwise point out that since Treasuries are federal government debt, the trust funds contain just worthless pieces of paper with a note written on them that says, “Dear Uncle Sam: I owe you lots of money. Love, Uncle Sam.”
I have to admit, I haven’t quite decided to which camp I belong. I’m inclined to go with the latter. After all, when, say, 2020 rolls around, and the Social Security Administration needs some money from the trust fund, it will take one of these special-issue Treasuries to Uncle Sam and want to exchange it for cash to be sent to retirees. Where will that cash come from? I almost think I need to see a spreadsheet or detailed flowchart or something to fully understand how all that will work. If you have suggestions for how to accurately think about the trust funds, I’m all ears.
For now, plan on getting less
That’s enough talk about Social Security for now (assuming you’re still reading). From a financial-planning perspective, I’ll reiterate my advice from my last post. If you are in or near retirement, plan on getting your benefit. If you’re younger, play it safe and plan on getting 25% to 75% of your projected benefit. But plan on getting something.
I’m sure you have your own thoughts and opinions about Social Security, and I encourage you to share them below. However, let me say this: Often, discussions following articles about Social Security turn into political brawls that degenerate into name-calling and general silliness. So please, all you right-wing nutjobs and left-wing commies, let’s keep it civil. Stick to the topic of Social Security and the facts. And maybe advice for creating a sweet comb-over.
This article is about Economics, News, Retirement
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@Nicole: “…I am deeply disappointed with Krugman’s incredibly irresponsible piece on this topic in the NYTimes.”
For those who haven’t read it, I believe Nicole is referring to this column:
http://www.nytimes.com/2010/08/16/opinion/16krugman.html?ref=paulkrugman
Nicole, care to elaborate on that? Because I think Krugman pretty much nailed it.
There may be issues with Social Security, but the bigger issue is social insecurity. Fear. And worse, resigning ourselves to the myth that it’s just going to go broke or disappear somehow. There are people pushing this myth precisely because they want it to happen.
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I might be able to get some benefits, but like Zack #1 I’m not counting on it. That way, anything I do get will be a nice bonus.
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Social Security is unsustainable: fewer and fewer workers supporting more and more benefits. (Compare the birthrate in FDR’s day to what it is currently.) How on earth anyone expects an upside-down pyramid not to topple over and crash in our lifetimes is beyond me.
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Unless we decide to make more babies to support these benefits, the only chance this program stays afloat is if we raise the social security age to unattainable levels. Personally, I’d prefer if the government just let me opt out of it.
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Of course Social Security will still be there when you retire. It’s been around for 75 years, it’s not going anywhere. No politician in their right mind would dare broach the idea of killing it off. How would that even work? Would you gradually taper out the benefits for current retirees, while the current generation of workers pays into a system that is being wound-down before their very eyes? And you think voters would accept that? Really?
The die has been cast. Ever since the program was started, and benefits were paid to people who never contributed to the system, it was inevitable that the program must either eventually collect from people who will never be paid, or continue forever. The political no-brainer is to keep the system going forever. I can’t think of any better way to guarantee a 1-term presidency than to preside over the Congress that killed Social Security (while still asking the current crop of workers to keep paying). The alternative would be to simply flick a switch and terminate both contributions and benefits simultaneously, immediately condemning millions of retirees (read: voters) to poverty. Equally politically suicidal.
Don’t give in to scare-mongering. Social security is not going anywhere. At some point in the next 30 years, yes, they might raise the retirement age another year or two. Or, they might bump up your FICA deductions by a percent or two. Or, they might even raise the income cap a few thousand dollars. But here’s the kicker: any one of those solutions would solve the problem, and none of those solutions sound particularly painful or dire to me. So what’s with all the panic?
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I consider the money to SS a donation for all the people who have fought in the war, marched for rights or my kindergarten school teacher etc. It is my current way of caring for todays elderly.
That isn’t true but whatever makes it easier to look at that $$$ gone each pay.
It is better to assume no return and still save. I don’t want to be eating dog food when I retire. If SS is around, maybe I can use that money to travel.
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When people say they won’t receive social security, I take that to mean that they understand that they will receive a negative return on their investment (Social Security is really just a forced retirement program).
Also, the treasury bonds held by the SSA have value but they have to ‘re-tax’ to collect on them. The government agencies which spent the money do not have a means to repay them.
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Lil #74 had a point I’m glad someone finally got to. My personal reason is family history, but I do not expect to live to receive SS.
I do not believe the program will ever disappear, it is to politically favorable. However, I saw someone else post this somewhere above, according to the SS website 67 is the maximum age to get ‘full’ benefits, however, I remember getting many forms from the administration saying 72 was my ‘full’ benefits age.
Similarly a couple people mentioned a coup of some sort, and I do not believe this is out of the range of possibility given our governments current job.
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@Kevin (105) I agree that none of those solutions sound that bad, but clearly nobody wants to be a member of the Congress That Decided Voters Don’t Get Benefits Until They’re 78, or the Congress That Deducted Even More From Your Hard-Earned Paycheck. So Congress does nothing.
I think the reason those of us in our mid to late 20s don’t believe we’ll get anything from SS is that we’ve been hearing about these potential not-so-painful solutions at least as long as we’ve been able to vote, but nobody’s actually gone through with them. With each passing year of government inaction, the numbers look more grim.
But there is no panic. We’re calmly and realistically planning for our futures with no (or very small, very late) Social Security benefits.
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Side note here: Can people please stop comparing the US to Greece? Because there’s a critical difference between Greece’s debt and the US’s debt. Greece had a debt in Euros. The US has a debt in dollars. The US can print dollars. Greece can’t print Euros.
Now, inflation is another concern, but as long as the dollar is the reserve currency, the US can pretty much print away. Even right now, with the US debt at very high levels, there are *deflation* concerns, not inflation concerns. Treasury yields are falling as investors around the world look to them as the safest investment. Not a lot of signs that the market is worried about the devaluation of the dollar.
Can you imagine a scenario in which the US pays out Social Security benefits to someone and the check bounces?
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Very well laid out article and case for future SS. Some problems with the system include the fact that life expectancy was MUCH lower when it was established, new and innovative medical advances are increasing costs big time, and there are fewer and fewer workers per retiree in the pool due to decreasing birth rate. All these factors ensure that we will NOT receive the same level of benefits in real dollars that our parents will/do.
So
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Also, SS is not just retirement benefits.
SS pays for disability, and those applications are on the rise.
Yes, you will initially be denied, no matter how severe your disability, but if you hire an attorney and jump through the paperwork hoops you will eventually qualify for SS disability.
A big benefit of SS disability is Medicare eligibility within 24 months (immediately for some diseases)
The above is another HUGE drain on SS few discuss.
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It looks like everyone so far has forgotten a case:
If you’re a certain category of state employee (including most school teachers and university employees), you WON’T get Social Security because you’ve been trapped in your state pension system instead.
Apparently I was six months short of being eligible for any kind of Social Security benefits when my first (corporate) employer crashed and burned in the dot-com bust. My next job was at a state university, where we can’t pay into Social Security, and we can’t make up the years of pay we put into the university system if we ever end up going back to the corporate world. My state’s pension system is currently only 60% funded and there are rumblings about calling it bankrupt and letting us all fend for ourselves with neither a state pension nor Social Security.
For those of us who can’t rely on the federal government and have to depend the states that employ us (several of which are on the verge of insolvency this year, as opposed to 30 years down the road), we wish we had Social Security’s “problems.”
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Comb-overs are worse than the Social Security mess.
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Never expect to get any benefit from money taken by force.
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My biggest beef with the Social Security discussion (and you contributed to it with this post) is that most people only talk about it as a RETIREMENT program.
While it contains benefits that might be construed as retirement benefits, it’s actually structured as an INSURANCE program. In fact, it’s often referred to as OASDI, meaning Old Age, Survivors, and Disability Insurance. It’s essentially a significant insurance policy against growing older than your assets will allow you to live a decent lifestyle, against the income earners in your household of dying young, and against a long-term disability preventing you from working.
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Not to throw another political hot potato into the mix, but:
There have been several posters who referred to declining birth rates (fewer people paying into the system) contributing to the problems the system faces.
Allowing more legal, working-age immigrants into the country would be a solution to this issue. Currently the immigration system is a bureaucratic maze and doesn’t allow work visas for many who would like them. That’s part of why we have the illegal immigration problems we do. Making it easier to navigate and easier to come here to work or start a business legally could actually help fund programs like Medicare and SS.
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What I find so insidious about the far-right is their insistence that Social Security is some sort of entitlement (codeword for ‘charity’) program rather than the straighforward insurance program into which millions of Americans have been putting their own money for decades. In addition given the dubious, if not openly dishonest and fraudulent, manner in which Wall Street has been involved with the near collapse of the world economy, why should I feel any confidence that Republican programs to privatize Social Security and put it into the hand of these same people will suddenly make them honest and straighforward. I for one do not feel that confidence and see no reason why I should trust them with my retirement funds. Particularly since it is a repeated Republican policy to get rid of the kind of oversight and regulation which would prevent any such fraud.
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I think SS will be around for years to come but the expected payout amounts may well be reduced because there is just not enough money coming in to keep up. The trust fund should have never been allowed to be moved into the General Fund for the Government to spend for anything and everything they wanted now. If the SS money being pay in from today forward were truly put into a trust fund to only be used for SS payouts it could be around for many many years to come. Also if you did not put anything in you are not going to get anything out. I paid into SS for 44 years and expect to draw out most if not all that I paid in. I am retired now and not collecting my SS yet but with the prices of everything going up it will really be needed by the time I do start collecting just to keep my bills paid and try to maintain my current standard of living. Four years ago when I retired I was able to pay my bills, travel a little and still have a few hundred left over at the end of the month. Today I am still paying my bills, travel has stopped and if I have a couple of hundred left at the end of the month it is because nothing broke down or wore out and had to be replaced. Something is going to have to give or I could be forced to seek employment in my old age and I am getting older every day. I am trying to hold on until I am 66 to draw what is coming to me.
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After paying into SS for 16 years I have no faith in it ~ I now have a city job and pay into the state retirement plan instead of SS. I doubt I will ever see more than pennies on the dollar that I paid into SS and decided I need to invest in a better retirement plan instead of giving away my money ~ a 401k is also a great idea
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After reading many posts I realized that SS is an insurance and I will tap into it only if I need to. If I have saved enough to sustain me through my retirement, I will not apply to get the benefits at all.
If enough people pledge to do the same for the sake of the less fortunate, Social Security need not go bankrupt at all.
@David, what would you like to have done with the trust fund surplus through the years? Would you just leave your SURPLUS savings in non interest bearing account for ever? That would be silly. So if you want to invest it, where would you invest? If you think about it, the safest investment for it would be US Government bonds isn’t it?
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Social Security and its revenue partner, Federal INSURANCE Contributions Act taxes, are a mortgage place by this generation on the following generation. People used to sell their children as slaves. Now we just pawn them.
The idea that millions will starve if SS flops has no basis in history. People have been taking care of people for thousands of years. It doesn’t always work for everybody, but then neither does depending on government always work for everybody.
The big difference is that if this or that individual fails to care for that or this needy dependent, the impact is localized and individual, here and there. If government flops in taking care of the needy, millions will suddenly be needy simultaneously. When it does fail, Government failure is universal.
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I’m 26, I already know that I will recieve nothing from SS when I retire. What I am upset about is the fact that I still have to pay in. Especially since SS is just used to fund entitlement programs now. Remember, at one time there was a huge surplus in the SS budget.
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As others have said, we understand that people will be working and social security is a pay as you go system. But I’m soon to be a 35 year old and like most people my age or younger have said we don’t expect to get anything.
Here are a list of reasons why:
1) We’re already starting to pay out more than we take in.
2) People are living longer and will collect benefits longer
3) We’re lowering social security taxes and taking even less in with lots of baby boomers getting ready to retire in the near future.
4) Our govt. has been borrowing from social security to pay for well almost anything they can pay for and putting IOU’s back in. We all know the govt never changes their minds about IOU’s or programs in general.
5) Diminishing returns on investments or times when the economy goes into a recession.
My list could go on and on but my opinion is that at some point the strain on social security will be to much and the govt will cancel it or try to pay out people in some form. As the social security populations increase and decrease (ages 65-70, 70-80, 80-90, 90+) certain groups won’t put up with lowering and raising social security pay outs. Those that are 70-80 only get 75% but 65-70 get 85%. I just don’t see social security making it. Had the govt kept their hands out of the pot social security would be booming and it would act like a pension plan.
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