This spring I turned 65 and applied for Social Security (SS). As a senior collecting retirement benefits, I do not want to see benefits cut or retirement age increased. However, as an American concerned about my family and my future, I am bothered by the impact of the current system on the nation’s future debt. I took a look at my contributions to FICA and my benefits. I know it gave me a better understanding of SS.
Many of us think of SS as a 401k, or IRA, but according statute, Social Security it is a social insurance program that is funded by dedicated payroll taxes. These taxes are then deposited in a Trust Fund and benefits are paid out of the Trust Fund. If the fund runs out of money, it will be due to the underfunding resulting from changing demographics.
Social Security is essentially an insurance program. Often after a region is hit with a natural disaster such as a hurricane, or earthquake, homeowners insurance rates jump. This compensates for the high losses and the higher risk. Social Security payouts increase not because of disaster, but because people are living longer, and I think most of us realize that we are all living longer.
When Social Security was enacted in the mid 1930’s, life expectancy of a white male was in the low 60’s. The retirement age then was 65, today it is 66 and the life expectancy at birth is over 78. That is only part of the story. According to the Social Security Administration, I can expect to live to 83, while an online site that takes into account health factors projects I should live to 87.
Of course the FICA tax, which funds Social Security, has been raised and benefits adjusted, but not nearly enough to compensate for historic demographic changes. I went back to look at my taxes and benefits. Over a 40+ year work career, I paid in $107,094 for FICA. My monthly benefit today is $2197.40, and without any change in benefit I will have used up my contributions in 48 months, even though I am expected to live about 220 to 270 months.
If I live to 83 without any increase, my payout will be almost $500,000 and almost $600,000 if I make it to 87. Even if I was getting 5% interest on my contributions they would be worth less than $250,000 much less than I will collect. This is one of the main problems with social security today. The surplus that has built up in the Trust Fund will soon be depleted by baby boomers like myself not by the government.
The other major issue is the shift in the age of our population. We could survive the underfunding of social security trust fund if we had another baby boom, but just the opposite is occurring if we think of those under 65 as the payers and those over 65 as the paid. In 1950, 92% 0f the population was under 65 and only 8% over. In 2010 the numbers are 88% and 12% in 2020 the projection is 84% and 16%. The number of payers into SS is going down while the number being paid benefits is going up.
Although, the problems seem daunting they can be fixed if we do not bury our heads in the sand or entrench in our positions. Yes, we will have to raise the age of eligibility, and cut benefits or at least slow their growth. We will also have to increase the FICA taxes. We need our political leaders to take these hard steps, and we need to support them. We all need to make some sacrifice for Social Security to remain viable.