The Old Age, Survivors and Disability Insurance (OASDI) Program, commonly known as Social Security, was originally enacted into law in 1933 under US President Franklin D. Roosevelt. OASDI was a major legislative victory for the New Deal. The name implies the program was established as an "insurance" program; i.e., an actuarially sound investment system that allowed workers to contribute in the form of payroll taxes, build a nest egg with compounding interest, and receive benefits upon reaching retirement age. The facts, however, are very different.
American workers began paying taxes into Social Security via the Federal Insurance Contributions Act (FICA) as soon as the law was passed, but no benefits were paid for several years. Employers are required to match the employee contribution. Those who are self-employed effectively pay double. The initial beneficiaries (aged 62 and above) had paid almost nothing into the system. In 1933, there were roughly 17 workers for each retiree, and the life expectancy for men was 65 years. Today, there are only 3 or 4 workers for each retiree, and the life expectancy for men is almost 80 (even older for women). The full retirement age has been raised slightly to 66 for those approaching it currently and to 67 for younger citizens. So the original program envisioned paying benefits for an average of 3 years, but the current expectation is that benefits will be paid for 13-14 years!
The percentage of the FICA tax, as well as the maximum wage on which it must be paid, has risen steadily since the original 1933 law. Congress has tinkered with Social Security many times, always claiming they had "fixed" it so that it would not go bankrupt. FICA taxes are collected in the Federal Old Age and Survivors Insurance Trust Fund, commonly known as the Social Security Trust Fund. However, in recent years, we have learned that Congress has been "borrowing" from the Trust Fund to pay other federal expenses, so the reality is there is no "Trust Fund". Social Security is just one more unfunded government entitlement program. In FY2010, outlays for Social Security exceeded all other expenditures, even those of the Department of Defense. The total was $695 billion, or 19.5% of total federal spending. The DoD came in second at a mere $453 billion, all while pursuing two wars in Iraq and Afghanistan.
But is Social Security fiscally viable in the long run? Here's what the non-partisan Congressional Budget Office (CBO) has to say. They projected outlays versus tax revenues under a number of economic projections for the next 60 years. A CBO graph posted on the SSA website shows Social Security outlays will exceed tax revenues beginning about 2015 and continue to do so thereafter. The outlays will reach roughly 6% of the entire US Gross Domestic Product (GDP) by 2030. Other projections show an almost exponential rise in benefits paid, with no end in sight.
What will the US government do about this growing problem? For roughly 30 years, Congress has merely applied "band-aid" solutions to Social Security. In the popular vernacular, they have continued to "kick the can down the road", pushing the problem off to future Congresses. But now we have "run out of road." Former President George W. Bush wanted to slowly "privatize" Social Security by turning it into a government-run 401-K plan for younger workers. He quickly learned how "radioactive" this issue is. Special interest groups went after Bush. Whether he was right or wrong to propose that solution, the message was clear. Either national party that dares to address Social Security will pay a heavy political price. In the USA, this program is a true sacred cow.
What could we do? I offer some suggestions. First of all, it's time to admit that Social Security is and should be a "welfare" program for low-income seniors. (Roosevelt wanted to avoid that label, but the time has come to admit the truth.) All recipients of Social Security should be "means tested" - if your Adjusted Gross Income (AGI) is above a to-be-determined number, you don't qualify. The maximum current Social Security payments are about $2,000 per month or $24,000 per year. If your AGI is more than, say $150,000, you probably don't really need it. Second, structural changes in the program are badly needed. The retirement age should be raised commensurate with the current life expectancy. On the revenue side, the FICA rate or the maximum FICA income could be further increased, although that won't be popular, especially if many of those who pay more can expect to be ruled ineligible to receive benefits when they retire. We could put a cap on the Social Security COLA (Cost of Living Adjustment) that increases with inflation. Finally, we could (but almost certainly won't) admit that Social Security is simply fiscally unsustainable and phase the entire program out.
How will any of these changes affect the Baby Boomer generation? Almost certainly, there will be fewer dollars (or devalued dollars) to count on for their retirement years. This will be the case no matter what (if anything) the government does. Second, younger Boomers can expect to pay even higher taxes during their working years, reducing their ability to invest and save for retirement. They can expect to work longer. There will almost certainly be major political anger over the broken promises of the US government to its own citizens. We've seen indications of how this might play out in Greece, Italy, Spain, and the UK. Those who have paid taxes into this system their entire lives will be understandably angry if they are told they will get nothing out, and political leaders will pay the price. The children and grandchildren of Boomers will also pay a price: higher taxes, less (or no) benefits.
What should Boomers do? Regardless of your political persuasion, you should insist that the Congress address this issue now. The time for "kicking the can down the road" has passed. Second, Boomers should begin to find financial alternatives if this retirement benefit disappears or is greatly reduced. These alternatives include re-assessing investment strategies (in the words of Robert Kiyosaki, become "financially educated") as well as considering new business ventures to generate income after working years are over. Third, Boomers can adjust their retirement expectations: work longer and plan to live on less.
We recommend that Boomers take matters into their own hands. In our view, choose empowerment over "entitlement." They should pursue more financial and investment knowledge and alternative income sources. They should not assume that government or company pension plans are guaranteed or that government will "solve" the Social Security problem. Boomers must find their own solutions.
"Dr. Dick" Pritchard, an "early Boomer", is a successful high income professional and Internet marketer. He works with Boomers like himself to create wealth and diversify income sources.
You can learn more by visiting Dr. Dick's website at http://drdickpritchard.com/
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