All of us have heard, at one time or another, that social security will not last; that eventually it will become unsustainable and implode. The root problem, that makes it unsustainable are demographics. Social Security Reform.org explains this demographic problem quite simply:
The reason that Social Security’s deficits are inevitable is fairly simple. Demographics are more predictable than most events. Millions of baby boomers will begin to retire in 2008, when those born in 1946 reach Social Security’s early retirement age of 62. From then until 2025, every year will see another crop of baby boomers reach the 62 year-old threshold. Because the baby boomers have not produced enough children to replace themselves, the number of taxpaying workers will shrink.
Many believe that social security is set up where an individual pays in and their total savings accumulates. Not so. Social security could be accurately termed a “Ponzi Scheme,” as the funds being paid in are immediately turned over and paid out to recipients.
The first recipient of social security was Ida May Fuller in 1939. Her total contribution was $24.75 and she collected $22,888.92. This system does not involve a complex (or simple) system of investments and capital allocation.
Social security is extremely difficult subject for politicians to address. They acknowledge that social security needs reform, yet the drastic reform that it does need is hardly ever put on the table. This is because social security is embedded in the minds of Americans as something they are entitled to. In their defense, those who have had to pay into the system do deserve something in exchange for those taxes, but the current system is on track to overwhelm the federal budget.
As a young adult, I am already certain that social security (in it’s present form) will not exist when I reach my retirement age. Even if I do have to pay into the system, I realize that it is impossible to maintain and will not last. Almost everyone else I talk to who is in their 20s also does not have much optimism towards social security.
This provides a significant challenge to our generation. We need to deal with the social security taxes while not expecting to receive anything in return. We need to be smarter about saving for retirement and our futures. Put at a disadvantage by no fault of our own, the only option is to cope with the situation we find ourselves in. Whether that means becoming more financially literate, working longer, or saving aggressively, we are certainly in for a major challenge.
Readers, what are your thoughts on social security? Do you expect the system to last until your retirement? Also, how have you prepared for retirement faced with the reality of the situation?
Best,
David
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