This is the worlds leading source of financial content on the web, ranging from market news to retirement strategies, investing education to insights from advisors.
Forex Forever!

Americans Are Living Longer, but Social Security Is Not Catching Up

Author: Christopher Harris

Social Security is in trouble, but it isn't going broke. Based on its structure, it's impossible for it to go bankrupt. Instead, Social Security is an ongoing wealth transfer that has a growing age problem and a demographic problem.

To understand the impact of an aging population on Social Security, it's necessary to understand how the system works and how it divvies up payments.

Social Security Is Not a Retirement Program

The popular narrative surrounding Social Security – indeed, the very language the program was sold on in the 1930s – is patently false. Social Security is not a retirement program or an insurance scheme for retired workers, despite how politicians represent it. Social Security is an active, year-over-year wealth transfer program from current workers to current retirees. There is very little real relationship between the amount of money an individual pays in and the amount of money he will eventually receive.

It's not a pension fund into which a worker puts earnings until he is elderly. Unlike a real retirement program, such as a 401(k) or a private pension in which each saved dollar is invested and made available again to the same worker later in life, Social Security is the umbrella title for two separate government policies.

The first policy is a tax on worker's earnings. Superficially, workers pay 6.2% of their income in Social Security taxes (FICA taxes), and their employers are supposed to match with a 6.2% tax. Economically, however, the employee bears the entire 12.4%, since the employer must reduce the wages and benefits to the employee by at least 6.2% to compensate for the taxes it pays.

The second policy is, for lack of a better term, a welfare payment for the elderly. Unlike other welfare programs, which are means-tested, Social Security does not take into consideration the income or wealth of its recipients; it only considers their ages and their respective time spent working in covered industries.

This creates a scenario with a simple ledger. In the first column are the total taxes paid in by current workers. The second column is made up of the total welfare distributions to qualified recipients. The so-called Social Security reserve is not a reserve at all; it is an account at the U.S. Treasury that holds surplus taxes from the first column, should any exist. It is presently filled with IOUs, since the federal government raids the reserve to pay for other programs each year.

An Age Problem

Americans are living longer, which creates some uncomfortable accounting realities for the present Social Security system.

Social Security was signed into law in 1935. According to the Social Security Administration (SSA), an American male born in 1930 was expected to live to be 58 and an American female was expected to live to 62. So when FDR and the Congress set the official retirement age at 65, fewer than half of all Americans were expected to ever collect a single Social Security check.

According to the U.S. Centers for Disease Control and Prevention (CDC), the average life expectancy for an American in 2015 was 78.8 years, and those surviving to age 65 could expect to live an additional 17 years (males) to 21 years (females).

This means that the second column in the Social Security ledger – those receiving the welfare payments – doesn't shrink as quickly as it used to. In fact, due to demographic pressures, the number of recipients grows every year.

A Demographic Problem

U.S. Census data shows that there were only 9 million Americans aged 65 or older by 1940. Seventy years later, the Census Bureau reported more than 40.3 million people aged 65 and older.

According to a study by the Mercatus Center, there were only 2.9 current workers paying FICA taxes to support every Social Security recipient in 2010. That compares to 16.5 FICA-paying workers for every recipient in 1950. Retirees are living longer and receiving more checks, but there are far fewer taxpayers to support each of them.

Mercatus found that the system is stable, given 2012 benefits, "when there were more than 3 workers per beneficiary." Wealth transfers are only sustainable when there are at least enough dollars coming into the program to support outlays. Soon – perhaps as early as 2030 – this won't be the case.

last five articles

#1750 Supply Chain Management Jobs Are Booming

Author: Matthew Williams and processing industries depend heavily on a carefully managed supply chains to ensure they have the inputs they need to create the right amount of product at the right time. While this may sound fairly straightforward, there is a lo... see more

#1723 This Is Why Your Employer Should Offer a 401(k)

Author: Daniel Smith

The widespread elimination of traditional pension plans and defined benefit plans has created a greater need for individuals to take responsibility for their own retirement savings. Setting aside enough money for retirement income needs can present a challenge to some individuals, as personal con... see more

#28 529 Risks to Take (Or Not)

Author: Matthew Taylor

When you first start to delve into the fine print of tax-advantaged 529 plans – typically shortly after your first baby's birth – it's daunting. It feels as though there are at least 529 different options, rules and regulations for these funds. Actually, the 529 nickname comes from Section 52... see more

#478 Why You Shouldn't Worry Too Much About New Student Loan Rates

Author: Andrew Smith

By Amy He A new federal loan interest rate went into effect on Monday, doubling from the previous rate of 3.4% to 6.8%. In 2007, the College Cost Reduction and Access Act sought to lower rates on subsidized Stafford Loans for four years. After the four years were up, Congres... see more

#1441 This Is How You Could Live in Thailand on $1,000 a Month

Author: Daniel Harris

Thailand is one of the world's best-known tropical paradises and home to many thousands of expatriates enjoying a comfortable, low-cost life amidst the country's virtually endless natural splendor. Thailand has undergone rapid development in recent decades, spurred partly by its tourism industry.... see more