The Social Security Issue

Those of us who saw headlines last week surrounding the release of the 2009 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds (status of Social Security and Medicare) saw a date that most likely triggered an immediate mathematical calculation, which might have gone something like this: Social Security will be bankrupt in 2037, which is 28 years away (round to 30), and in 30 years I will be X.  If your ‘X’ is 110 years old, that headline was probably not too worrisome. However, if your ‘X’ is somewhere between 70 and 90 years old, the headline probably caused an uneasy feeling in your stomach.

I am going to focus my comments only on Social Security, but there will be a future discussion about the Medicare problems, which are much more imminent and much more complicated. They are, however, also much more widely discussed, so I think a focus on Social Security may be more helpful.  Exactly what does the Trustee report—which says Social Security will be bankrupt in 2037—really mean?  Most reform plans preserve scheduled benefits, including cost-of-living increases, for current and near-retirees should not affect current retirees or very soon to be retirees at all.  So, if you fall into those categories you can heave a sigh of relief and stop reading now.  For those of us do not fall into those categories, continue on.

There are some who say that the current problems the USA is experiencing, such as the economy, the budget deficit, global terrorism, war in Iraq, war in Afghanistan, global warming/energy, etc., are the issues needing our attention today, and we can deal with Social Security tomorrow.  After all, we have 30 years, right?  Most of us live our lives according to a prioritized to-do list, and understand that although the list is filled with important items, some need to be taken care of today and some will have to wait until tomorrow.  Unfortunately, that mentality of, ‘Yes, the Social Security system is broken but we have plenty of time to fix it when we don’t have so many other things on our plates,’ has been the predominate mentality since the 1960s!  The only problem is that our plates keep getting more and more full with issues that are higher on the country’s priority list.

Let’s consider a quick explanation of the problem.  Social Security began in 1935 as part of Theodore Roosevelt’s New Deal to ensure that America’s retired elderly were not left in dire poverty through the remainder of the Great Depression (which ended up being a few more years), and it would provide that protection should something like the Great Depression ever happened again. At that time there were approximately 40 workers for every retireenow there are about three workers for every retiree.  In 20 years it is estimated there will be about two workers for every retiree.  Simple math tells us that a system that was enacted using calculations based on 40 workers for every retiree will probably not work with only two workers for every retiree.  On top of that, Social Security was designed to begin paying benefits at age 65, when average life expectancy was 63.

The first—and maybe only question you might be asking yourself is this: When the ratio of 40:1 began decreasing while the average life expectancy was increasing, why wasn’t Social Security ‘tweaked’ to account for these dramatic changes?  The fact that reducing benefits to retirees would likely be political suicide is the only answer I can find to explain why the issue has never been truly addressed.

The best part about this discussion is that the solutions are very simple: raise taxes, reduce benefits, or impose some combination of the two.  Raise taxes on workers who are already being told that there will be no benefits available to them when they retire?  Reduce benefits that American retirees counted on (and paid for) while they were working and rely on now?  Some combination?

We have 28 years before Social Security is totally broke!  Let’s just deal with this tomorrow.

Mealey, Jamie cropped

Jamie Mealey, CPA, CFP®

Jamie is the professional consultant for Dan West and Diane Compardo.