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Will Social Security Be Around in 20 Years?

Over the years, there has been a lot of hullabaloo over the solvency of the Social Security system here in the United States and whether or not Social Security will still be around in 20 years. Many people have fears and questions that are not sufficiently answered by those who represent us in congress.

(A quick note here: I am not trying to debate political issues about Social Security; merely to state the current condition, and what can be expected in the future.)

How Does Social Security Work?

The Social Security Act was passed in 1935, as part of President Roosevelt’s “New Deal” plan. One of the main purposes of the program (it encompasses many other items as well) is to provide a “safety net” for retired individuals. In other words, after working during your life, qualifying for social security [1], and paying taxes for social security (part of the FICA, or Federal Insurance Contributions Act, taxes) you would get a check from the government, based on your working wages, to serve as a form of government pension, in addition to whatever savings you already stowed away for retirement. Not intended to replace company pensions [2] and individual retirement savings [3], the program is meant to act as a “third leg” of those other two retirement funding options.

An important part of the Social Security system is that it relies on today’s workers to pay for today’s retirees. The FICA tax that comes out of your paycheck basically goes directly to your parents’, or grandparents’, social security check. When you begin collecting social security, your children and grandchildren will be paying taxes to fund your social security.

Current Social Security Tax Rate

The social security tax rate is usually 6.2% of your earnings (or 12.4% for self employed tax [4]). However, the Payroll Tax Cut [5] temporarily lowered the social security tax rate for the employee to 4.2% in 2011 and 2012. The employer still pays 6.2%.

What’s the Problem?

The basic problem with the way social security is set up is as follows: when the current generation’s population is larger than the previous generation’s, the retirees are funded very well. However, when the reverse is true, retirees are not able to collect as much.

Think of it this way. When the baby boomers began working, their FICA taxes were being used to fund Social Security for relatively few retirees. Just as an example (these numbers are made up, but express my point), let’s say there were 6 workers for every Social Security collector. The Social Security system would have plenty of money to pay retirees, and perhaps a surplus to put in a trust fund.

However, as the baby boomers did not have as many children as their parent’s did, these numbers change dramatically. For example, say that now there are 2.4 workers for every retiree. Clearly, these retirees will be unable to collect as much as their parents’ did, as there is not as much tax money coming in to fund the program.

And therein lies the problem; although there is a trust fund for Social Security, it will eventually run out as the retiree population increases, and the worker population decreases. Social Security Statements [6] state the trust fund will be depleted in 2037.

Will I Get Social Security When I Reach Retirement Age?

Will Social Security be around in 20 years? 25 years? 40 years? This is one of the most common misconceptions about the Social Security system. Even if the trust fund runs completely of money, there will still be workers paying into the system. Even if the tides are turned completely around, and there are more retirees than workers, those workers will still pay FICA taxes that will go to retirees. Will those elderly receive as much as the previous generation? Of course not. But they will get something.

There are three ways the government can help the program. They can raise the FICA tax (or the Social Security Wage Base [7]), raise the retirement age, or lower the benefits for retirees. All of these options have been discussed heavily in Congress for decades, and there has even been calls to end the program altogether, and give individuals the ability to fund their own retirement programs better.

Will the system ever be perfected? Probably not. Will it go away completely? I don’t think so, but I could be wrong.

What is your opinion? Will Social Security be around in 20 years?

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