Insecurity of Social Security

Will Social Security be there for you? According to the Social Security Administration's (SSA) web site, the answer is "absolutely" and "of course it will." They also point out, quite correctly, that the real question is what kind of Social Security system will it be?

Anyone who has examined the workings of the Social Security system to any extent knows that there appears to be very little security in Social Security. Created in 1935, the program was originally intended to help a small percentage of the population through hard times. Today, however, Social Security is the major source of income for two-thirds of the elderly. For a third of the elderly, it is virtually their only source of income.

At the same time, the number of Americans reaching age 65 is steadily increasing. By the year 2030, 70 million Americans will be looking to retire. This amount represents a staggering 20 percent of the expected population.

The really scary part is how the Social Security system is funded. The best way to describe it is a legalized Ponzi or pyramid scheme.

A Ponzi scheme, named after the swindler who invented it, involves an investment con in which some early investors are paid off with money put in by later investors, with the person at the top taking in all the money and deciding who gets what (usually less than participants expect). The Social Security system involves the federal government collecting money from those who are still working to pay for early investors (referred to by the SSA as an "intergenerational compact"), while deciding when and how much those retirees get (usually less than participants expect). See the difference?

The similarity to the typical Ponzi scheme is even more dramatic when you consider what the federal government does with the Social Security taxes it takes out of your paycheck. You would think that the money collected goes into a separate fund that earns interest and helps fund Social Security benefits. Think again. Money that comes in either gets directly paid out to retirees or, worse, is loaned to another federal government agency that is financially troubled in exchange for an effectively worthless IOU.

Now the enormity of the problem should be clear. Whether you run your own business or just balance your checkbook, you know that you have a problem when more money is going out than coming in. With no funds to fall back on, the Social Security system will start becoming insolvent in 2016, when its benefit payments exceed tax collections. In 2027, the government will likely have to begin redeeming invested funds. After 2041, only about 73 percent of benefits would continue to be paid based on incoming revenues, and that amount will continue to decline.

Of course, the Social Security system is not really a Ponzi scheme. The federal government does not actually intend to defraud the taxpayers who are required to pay into the system.

There are, in fact, numerous proposals out there to improve the system. The proposals all share the motto "no pain, no gain" because they involve either raising taxes or cutting benefits. For this reason, Social Security is a political hot potato that no politician wants to touch.

These statistics prove the importance of retirement planning, because Social Security benefits alone will not allow you to retire comfortably. Instead, it is up to you to factor Social Security benefits into your retirement planning equation realistically.