We hear people all the time saying they are not counting on Social Security to be there when they retire. According to a recent report by the Social Security Administration Board of Trustees, in 2033 the Social Security Trust Fund will become insolvent. From that point forward, retirement and disability benefits will be reduced by 23 percent. A retiree who depends on a $2,000 monthly check from Social Security will have to get by on $1,540.

How Could this Happen?

At some point that pile of money in the Social Security Trust Fund grew too large to resist. The politicians in Washington had to spend it. And spend they did. Congress reallocated the money and told the American people they could fund Social Security with new people entering the workforce. It worked for a while, but they failed to take into consideration one important factor.

In 1950, the life expectancy in the U.S. was 65 years. Today, thanks to better nutrition and advances in medicine, the average lifespan is 79. What is good for us is not necessarily good for Social Security. The scales have tipped. There are more retirees drawing Social Security than there are workers paying into it.

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A Bit of History

In 1935, the Social Security Act was signed into law by President Franklin Delano Roosevelt. Workers contributed 1 percent of the first $3,000 they earned. Over the course of the next 80 years, the contribution rate was increased to 6.2 percent and the maximum taxable earnings currently stands at $168,600.

What Can Be Done About It?

One proposal to fix Social Security is to increase the worker contribution to 7.2 percent. The rate has held steady since 1990, but prior to that beginning in 1950 it was increased virtually every year.

If both the rate at which we are taxed and the amount that gets taxed has been increased time and again, are we supposed to believe that if congress raises the rate just once more all of our problems will disappear? Something more needs to be done about it.

Privatizing Social Security

In 2005, President Bush put forward a plan to privatize Social Security. His proposal would allow workers to invest a portion of their Social Security in the stock market. It sounded like a good idea, but not everyone was onboard. Some members of congress and others resorted to fear-mongering to fight the proposal. They claimed the stock market is too volatile to invest retirement savings and it would bankrupt the system.

One-third of all Americans participate in some form of employer-sponsored retirement program such as a 401(k) plan or TSP account. The majority of that money is invested in the stock market. Stocks have traditionally provided higher yields than bonds or interest-bearing accounts. If the stock market is good enough for the one-third of Americans smart enough to participate in their employer’s retirement plan, how can it be too risky for a small portion of one's Social Security? In the end, the measure was never passed and Social Security remains in peril.

The Last Word

Will Social Security run out of money? Not entirely, at least not at first. If congress fails to act, in about a decade retirees will be faced with significant cuts to their benefits. It’s not an urban myth, it is clearly stated on the Social Security Administration website. 

What can be done about it? It is hard to change the world but you can change yourself. If you are not participating in your employer’s retirement savings plan, start participating. Most employers match a percentage of your contributions and that is free money that you are passing up. Get busy and start saving for your retirement. 

If you are already doing that, then write to your congressperson. Tell him or her to knock off the nonsense in Washington and start doing their job. Something needs to be done about this. Social Security is not enough to live on, and in the not-too-distant future it will become even less.

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