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TMFBro (< 20)

Is Social Security really in bad shape?

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August 13, 2009 – Comments (5)

One of my first articles for The Motley Fool, way back in 1999, was anti-Social Security. Since then, I've somewhat moderated my view. It basically comes down to this: I'd be better off if I didn't have to pay the tax and could invest it as I see fit, but that's probably not the case for most other Americans. I've been saving for retirement since my early 20s, and -- as a Certified Financial Planner -- I should know a thing or two about investing. However, I've seen enough to know that most people save too little, too late, and not well.

You might be saying, "If people don't save, then it's their own darn fault, and they should suffer the consequences -- which is working longer, not the worst thing in the world." I actually have a good deal of sympathy with that argument. I suppose the counterpoint could be that if older people work longer, there will be fewer jobs for younger people entering the workforce.

Anyway, whether you think Social Security is a good idea or not, there's still the issue of it being unsustainable. People will often refer to it as "bankrupt." But how bad off is the program?

Douglas Elmendorf, the director of the Congressional Budget Office, posted a link on his blog to the CBO's recent Social Security analysis. According to their number-crunching, it would only take raising the payroll tax, currently 12.4%, to 13.7% in order to make the program sustainable. Sure, no one wants higher taxes. But that doesn't seem catastrophic.

Bruce Webb over at the Angry Bear blog described the results of the CBO report this way:

"Per this report Social Security will be able to pay out 'scheduled benefits' until Trust Fund exhaustion in 2043 and thereafter will be able to pay out 'payable benefits' at a rate starting at 83% of scheduled benefits and then gradually sinking to 78% by 2083. Even after adjusting for inflation benefits after 2043 will be better than retirees get today in real terms even though they will be a smaller replacement percentage. That is our children's retirement will be materially better than that of their grandparents if not quite keeping up with the working life gains of their own grandchildren."

That doesn't sound too bad to me. It certainly doesn't look like Social Security is "bankrupt."

But wait! What about the trust funds, which have nothing in them but IOUs from Uncle Sam? Where will he get the money to turn them into Social Security benefits checks in several years?

Well, maybe the program isn't as not-as-bad-off as it sounds.

For what it's worth, I would start fixing the program by raising the eligibility age before raising taxes. From then on, it would be indexed to life expectancy.

5 Comments – Post Your Own

#1) On August 13, 2009 at 10:39 AM, greenvillewolf (44.60) wrote:

I believe in regard to most issues, things are never as bad as seem or as good as they seem. The truth lies somewhere in the middle.

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#2) On August 13, 2009 at 10:43 AM, StopLaughing (< 20) wrote:

If unemployment stays high there will be less going into the so called trust fund. Further, since Congress borrows (raids) the trust fund (there is no trust fund) ability to pay SS is based on the governments ability to tax and borrow or sell T-bonds in the future.

If (as) the dollar collapses who will fund SS (Bernanke ?). Holders of T-Bonds will sell not buy.

Taxes will rise, the cost of imports will rise, but the amount of money generated by the SS tax will be constrained by high unemployment.

All of the projections are based on false assumptions and are flimsy at best.

Who knows if SS is solvent or for how long. It is all Enron accounting.

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#3) On August 13, 2009 at 11:08 AM, davejh23 (< 20) wrote:

Social Security wasn't designed as a permanent retirement program.  The eligibility age should be raised to slightly higher than the current average life expectancy, and taxes should be cut.  I agree that "I'd be better off if I didn't have to pay the tax and could invest it as I see fit" (I would, literally, be able to save millions that I will probably never see from my SS benefits), and that may not be the case for most Americans, but maybe most Americans need a lesson in financial discipline.

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#4) On August 13, 2009 at 11:20 AM, TMFKris (93.70) wrote:

I don't think it's a matter of "financial discipline." Investing is hard, and schools mostly don't teach it. Catastrophes happen and money must be spent. And if you retire at a time when the market is way down, you'll have lost perhaps most of what you saved, if you had it in stocks. 

I agree SS isn't meant to totally fund retirement, but for many people it's essential.

Kris (TMFMiloBreathed), Motly Fool online copyeditor

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#5) On August 16, 2009 at 6:25 PM, Teacherman1 (28.44) wrote:

Dave,

I could not help being a little surprised at your suggestion that:

" the eligibility age should be raised to slightly higher than the current average life expectancy,"

Were you being sarcastic, or did you not realize what you were saying? If the eligibility age was raise to higher than the average life expetancy, the only way you could collect it is after you are dead.

As some have stated, the "trust fund" has nothing in it anyway except accounting entries, and current benefits are paid from current collections (with the Govt. spending the rest as fast as it comes in).

I myself would think a combination of a slight raise in the tax rate, plus a slight raising of the eligibility age is the way to go.

Of course I am probably looking at it from a different stage of the life cycle than you are, but I have worked and paid into it for almost 50 years. I hope to get at least some of what I paid in back.

I am not yet retired by the way, and don't have any intention of doing so in the foreseeable future (having too much fun working with middle school kids), but it was promised as a safety net, and many rely on it to just survive.

JMO and worth exactly what I am charging for it. 

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