This week marks the 75th anniversary of the Social Security program being signed into law by President Franklin Roosevelt. For the past decade there’s been a lot of talk about the grim future of social security and it is important for you to understand what the problems are and if you are going to be affected.
Social Security was created after the Great Depression in 1935 as means of taking care of people that were too old to work. The program is funded though a payroll tax of 7.65% of a worker’s income (with a cap at a gross income of $70,000) and is distributed to people over the retirement age. Presently, the youngest age you are able to elect to receive social security is 62 but the government incentives you with higher payouts if you wait a few more years. In 2008, the program paid out more than $600 billion, making it the largest government program in the world.
In theory, the idea of social security is a good one; the people currently working pay into the system and their money immediately goes back out in the form of benefit checks to retirees. This cycle would continue for generations to come and therefore be able to fund itself forever.
Unfortunately, this theory doesn’t work in reality. In 1935, there were many more people paying into the system than those receiving benefits. In the future, the retirement of millions of baby boomers will hurt the ratio; there will be so many retirees that the working people will not be able to support them. If the population had grown steadily this would not have been a problem, but there is no good way for the design of the Social Security System to handle a population spike like the baby boomers. In addition people are living longer, which means benefits need to be paid for a longer period of time.
Even with these issues, I want to assure all those readers who are presently receiving social security checks not to worry. Most likely, social security won’t see serious problems until 2041 when the Social Security Trust Fund would be exhausted.
However, for people a decade away from retirement and those who are younger, this is going to be a big issue for you. If nothing changes, in 31 years from now Social Security benefits will drop by 27% annually, and will continue to be cut each year after. Most of America relies on social security to sustain them financially after retirement. How will retirees make ends meet?
To fix social security some suggest that we should increase payroll taxes or decrease benefits. Obviously, Americans don’t like either of these options. Another intensely debated alternative is privatizing social security. This would mean that a person could take the money he/she pays into social security and invest it into private accounts. Republicans support this idea and note that if a worker was able to invest their social security in a 401k plan a much larger amount of money would be generated based on historical returns. Democrats point to the stock market crash in 2008 as to why they believe privatizing social security is a bad idea.
The future of Social Security is uncertain and you must design your retirement plans accordingly. Whether you are 22 or 52 years old, or if you are already a retiree and are concerned about the future economic welfare of your children and grandchildren, I recommend everyone start saving money now. Usually, the necessary amounts needed for retirement cannot be saved during the last few working years. If you don’t know how to invest money, I recommend you learn now, so you can take advantage of the tax savings a 401k, IRA, or SEP plans provide.