Jenny EriksonSocial Security is projected to run at a deficit in 2011 and beyond, with the coffers running dry by 2037. After all, there were an awful lot of babies born in the 1940s and '50s, and they’re just beginning to reach retirement age. Starting this year, there will be more money paid out to these retirees than paid in by workers.
In the Land of Balanced Budgets, there are only two solutions: Cut benefits or raise taxes. Neither is very popular, which is probably why politicians don’t like addressing the Social Security thing.
Let’s do some retirement math. Let’s say you’re 30 years old and making a decent annual salary of $50,000. Right off the top, you have to put $3,100 into a forced retirement plan called Social Security. Your boss has to put another $3,100 into that account for you instead of giving it directly to you. Instead of having $6,200 in your hands to invest however you see fit, the government is now in charge of it.
Assume that you had instead invested that $6,200 in the marketplace with an 8% rate of return. When you are getting ready to retire at age 65, that $6,200 will have grown into $91,669.13, without any other additions (that’s the magic of compound interest). Assuming you added to your retirement account each year, as well as paid off your mortgage and all other loans, you should be financially fine in retirement.
Now let’s give the government that $6,200. How much will it be worth after 35 years? Zero. Zip. Zilch. Nada.
How is that possible? It’s possible because the government is not holding your money for you in an individual account. All of the money paid by all workers gets put into one pot, and benefits to retirees, survivors, and the disabled get paid out of that pot. In other words, the money you handed over last month for Social Security went to Grampa Joe’s (or whomever’s) benefit check, not your future payout.
This might not be a huge deal; everyone pays a certain amount based on their income, and later they can withdraw a certain amount based on how much they put in. Except that the government has been borrowing against surpluses the past 30 years or so to fund other programs. There is no surplus in the pot to fund the swell of baby boomer retirees that is just now barely beginning, and there are not enough workers in the system today to cover that cost, let alone save any of it for their own eventual retirement.
This issue is something that politicians can no longer afford to ignore. The financial fit is about the hit the shan, and unless something is done, our largest entitlement program will collapse, and a lot of grandparents will be moving in with their kids.
It’s a good thing I really like my parents.