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As baby boomers near retirement, the social security system is nearing its own type of great depression. Social security was actually born out of America's Great Depression and the New Deal of Franklin Roosevelt. Four myths have loomed over the social security system ever since. Larry Ferstenou dispels these myths as they apply to baby boomers and social security. Your future, baby boomers and social security are inextricably intertwined.
Social Security Or Insecurity?By Larry FerstenouAuthor of You CAN Retire Young
Depending on the source you read, Social Security is facing a crises in either 14 or 38 years—the difference between those two numbers can be attributed to the “trust funds.” The issue is not the existence of these trust funds, but whether or not there will be any money in them when needed. For most baby boomers and those younger, the reality of the trust funds will spell the difference between a more secure or less secure retirement. It’s an issue for which you should be concerned; but it isn’t the only one. Here are four myths about Social Security that you may find surprising.
MYTH #1: IT’S IN THE CONSTITUTION Social Security is not included in the United States Constitution. It was a part of the Great Depression New Deal package of programs that President Franklin D. Roosevelt and his advisors conceived and presented to Congress. Their goal was to give America’s hard working people “something to live on when they are old and have stopped working.” Congress passed it in 1935. What started out a relatively basic program to cover the risks of old age grew considerably after 1935. Cost-heavy amendments were passed to extend coverage to families of workers, add Disability Insurance and Medicare, implement early retirement at age 62, and add automatic cost-of-living increases. Significant, too, is the continued growth in the number of recipients. According to the Social Security Administration (SSA), 222,000 people received monthly benefits in 1940; in 2003 it is over 46 million. Beginning about 2010, some 76 million baby boomers will begin retiring and it is projected that the number of older Americans will double by 2030.
MYTH #2: AN ACCOUNT WITH YOUR NAME ON IT Many people believe that the money taken from their paychecks for Social Security taxes (FICA) is placed in an account with their name on it. This account will then be the source of their future benefits—like an IRA or other genuine retirement account. That is a myth. The Social Security Administration refers to its program as an “intergenerational compact” or “pay-as-you-go” system. The workers of today support the generation preceding them (those currently in retirement). That system can be effective because several workers paying FICA taxes can support a retiree—called the worker-to-beneficiary ratio—without the percentage of taxes paid completely strapping the workers (although some argue that’s the case now). You can find a worker-to-beneficiary chart on the SSA Web site at www.ssa.gov. That chart is summarized below and reveals that the number of workers paying FICA taxes for each beneficiary has dropped dramatically since 1945 and will continue to drop for the next 72 years.
It is this decrease in the worker-to-beneficiary ratio, as well as the fact that our seniors are living longer, that is going to have the greatest impact on Social Security’s insolvency by 2017—unless significant changes are implemented. The bottom line is this: There is no account with your name on it and no guarantee that, when you reach retirement age, the generation under you will be contributing enough to support your monthly Social Security benefits.
MYTH #3: THE TRUST FUNDS The Social Security taxes we pay today are funding the benefits of today’s retirees. Currently, more money is coming into the system than is being paid out; hence, there is a surplus. Logically, one would expect that those surplus monies are being saved for the future in those trust funds we keep hearing about—just like you would save money in an IRA or other account to later take out and live on in retirement. But that is yet another myth. In reality, the trust funds are comprised of IOUs which the federal government leaves in return for borrowing that money each year to reduce the federal deficit (or for a couple of years in the 90s, to show a surplus). But beginning in an estimated 14 years when those trust funds need to be tapped to start paying benefits to baby boomers, where is the money going to come from to pay the interest on, and eventually redeem, those IOUs? The federal government will have only so many options. One of those will be to reduce benefits to retirees so that less revenue is required. In it’s latest report, “Status of the Social Security and Medicare Programs: A Summary of the 2002 Annual Reports,” the Social Security Administration presents three other options that will be available; they also clarify the “value” of the trust funds:
MYTH #4: FULL BENEFITS AT 65 A fourth myth is that you will be able to retire and collect full social security retirement benefits at age 65. In the “2003 Retirement Confidence Survey” conducted by the Employee Benefits Research Institute (www.ebri.org) and American Savings Education Council (www.asec.org), most people surveyed were unaware that the retirement age had been changed from 65 to 67. Only 16 percent were able to correctly identify the age at which they would receive full benefits, while 51 percent believed they would be able to collect sooner than will be allowed. Clearly, most people are not aware that the rules changed, even though they did so in 1983. If you were born in the 1950s or later, you can see from the abbreviated schedule below that your retirement age to receive full benefits is already either 66 or 67. And if you decide to retire at 62, the amount of reduction in those benefits increases—that is, you’ll get less money.
THE IMPACT ON YOUR FUTURE Myth #1 is an interesting fact, but not something you need to worry about. Expect Social Security to be around for a long time, even if it’s not guaranteed by the U.S. Constitution. But Myths #2, #3, and #4 are cause for concern. You may have learned from this article that your Social Security benefits are not reserved in your name, but will depend on the generation under you. That group will not be large enough to support you in the same manner that our seniors are being supported today. You probably also learned that you could be retiring one or two years later than anticipated. But most importantly, you should now be aware that your Social Security benefits may be less than you expect. The question for most of us is this: Should we continue to call it Social Security or rename it Social Insecurity? The answer depends on whether or not you believe the trust funds will be there for you. For more information on the myths exposed herein, try the SSA’s Web site at www.ssa.gov or an interesting site sponsored by the National Center for Policy Analysis, a nonprofit, nonpartisan public policy research institute. Their site www.teamncpa.org includes an interesting "Quick Facts" page.
Larry Ferstenou retired over ten years ago at age 42 and is the author of You CAN Retire Young! How To Retire in Your 40s or 50s Without Being Rich (American Book Business Press, 2002). More information can be found at www.youcanretireyoung.com. Copyright © Larry A. Ferstenou, 2002–2003
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