I am in my late 20’s. I keep reading that Social Security is going bankrupt. Will it be around when people in their 20’s & 30s retire? It seems like a Ponzi scheme.
J – Arizona
This is a good question and a fair observation. Let’s see if we can figure them out.
A background to how Social Security works
According to the Social Security Administration (SSA), benefits are paid through payroll taxes collected from current workers and their employers, and the program’s trust fund currently operates with a surplus of about $2.895 trillion.
The SSA’s latest projection has the combined Social Security (SS) trust funds that pay retirement and disability benefits running out of cash reserves by 2034. But that wouldn’t leave SS bankrupt and unable to pay any benefits. Even if Congress does nothing to shore up the system by 2034, SS will be able to pay out 79 percent of promised benefits until 2090.
The last time SS nearly depleted its reserves was in the early 1980s, when Congress shored up the program by gradually increasing the full retirement age from 65 to 67 and started to tax benefits based on income levels.
Since SS bankruptcy is theoretically highly improbable, Social Security is largely a pay-as-you-go program. This means that today’s workers pay Social Security taxes into the program and money flows back out as monthly income to beneficiaries. As a pay-as-you-go system, Social Security differs from company pensions, which are “pre-funded.” In pre-funded retirement programs, the money is accumulated in advance so that it will be available to be paid out to today’s workers when they retire. The private plans need to be funded in advance to protect employees in case the company enters bankruptcy or goes out of business.
While the SS program effectively helps to finance the federal budget deficit, the Trust’s investments are held in a separate ledger. Since its creation in the 1930s, the Social Security trust fund has never been part of the general fund, so politicians have not been free to spend the money on pet projects.
The way it works: The Internal Revenue Service daily collects payroll taxes paid by workers and their employers. This revenue is immediately invested in interest-bearing U.S. Treasury securities, as required by law, and credited to the Social Security trust fund. Social Security regularly redeems Treasury securities to pay benefits. Meanwhile, the government spends the proceeds raised from the sale of Treasury securities on a wide range of programs and projects. But the federal government is ultimately obligated to repay the money with interest to the Social Security trust fund.
Where some of the SS’s functioning receives its largest source of criticism is when critics view the SS program and the U.S. government as one and the same. In this regard, the U.S. government is spending the money raised by the program’s payroll deductions on general expenses. Thus we can view the program as a revenue generator and one that helps the federal government to balance its cash flow.
So, will Social Security go bankrupt?
Their study of retiree costs found that between January of 2000 and January of 2019, Social Security COLAs increased Social Security benefits by 50 percent, but the costs of goods and services purchased by typical retirees rose more than twice as fast — 100.3 percent.
Senior Citizen’s League – Social Security Benefits Lose 33% of Buying Power Since 2000, May 14th
So, let’s answer your question; will SS be around when people in their 20’s & 30s retire?
Think about this; why would the SS program declare bankruptcy? The most likely outcome of this would be civil unrest. Furthermore, based on our background analysis, the U.S. government effectively uses the SS program to help fund its deficit spending. This deficit spending is used to help fund our tax cuts, subsidies, and social programs. Contributors and beneficiaries all benefit from seeing that the SS program continues intact. We all profit from this ostensible Ponzi scheme.
But, as the population ages and the pool of potential retirees grows, the integrity of the trust fund faces increasing pressure. Thus, the federal government uses two methods; increasing the retirement age and underestimating inflation, to help alleviate the fund’s long-term real liability growth.
Raise the retirement age
According to the National Academy of Social Insurance, Social Security’s full-benefit retirement age is increasing gradually because of legislation passed by Congress in 1983. Traditionally, the full benefit age was 65, and early retirement benefits were first available at age 62, with a permanent reduction to 80 percent of the full benefit amount. Currently, the full benefit age is 66 years and 2 months for people born in 1955, and it will gradually rise to 67 for those born in 1960 or later. Early retirement benefits will continue to be available at age 62, but they will be reduced more. When the full-benefit age reaches 67, benefits taken at age 62 will be reduced to 70 percent of the full benefit and benefits first taken at age 65 will be reduced to 86.7 percent of the full benefit.
Furthermore, there has been continual talk in legislative circles about raising the full retirement age even higher. Perhaps, by the time you are ready to retire, incoming entrants to the work force may be confronted with a full retirement age of 68 or 70.
Continually underestimate inflation growth
According to a study released yesterday by the Senior Citizens League, Social Security benefits have lost 33% of their buying power since 2000.
Their study of retiree costs found that between January of 2000 and January of 2019, Social Security COLAs increased Social Security benefits by 50 percent, but the costs of goods and services purchased by typical retirees rose more than twice as fast — 100.3 percent. Food and medical costs — particularly for fresh fruits and vegetables, and prescription drugs — were among the most rapidly – rising costs over the past year. The study examines the growth since 2000 in price of goods and services that are typical for retired and disabled households and compares them to the growth in Social Security benefits due to annual COLAs.
Since 2000, typical expenses for seniors have risen twice as fast as the yearly cost-of-living adjustment (COLA) to Social Security. This annual raise is supposed to counteract the impact of inflation on Social Security, and while benefits rose 2.8% for 2019 (the highest increase since 2012), it is not enough to compensate for the mounting bills that seniors have to pay. The cost-of-living adjustment is based on increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The bump to benefits was 2.0% in 2018, 0.3% in 2017 and there was no adjustment at all in 2016.
According to the Senior Citizens League study, the average monthly Social Security benefit in 2000 was $816.60 a month, and someone who collected that amount 19 years ago would have $1,226.60 today, thanks to the annual cost-of-living boost. But that still falls short: to retain the same purchasing power as $816 in 2000, the monthly check would need to be $1,634.50.
This puts the 60 million Americans who collect Social Security at risk for a declining standard of living — particularly the more than two thirds who rely on Social Security as their main source of income.
So, will SS ever go bankrupt? The answer is no. So, we can ignore all that sensationalist rhetoric of imminent collapse. The concept of SS is too important to the U.S. economy, but it will die from a thousand cuts. So, we need to pretend it has already gone insolvent, because our future SS benefits will buy even less as the years roll on.
We better hope bitcoin goes to $100k