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Social Security's problems aren't as daunting as some make them out to be. According to the nonpartisan Congressional Budget Office (CBO), if indexed benefits "grow ... with prices rather than wages beginning in 2012," the Social Security Trust Fund would never become exhausted. Ever.
But there might be an even fairer way to fix the system.
Retirement, FDR style
The 1935 Social Security Act had a clear goal. "Every qualified individual ... shall be entitled to receive, with respect to the period beginning on the date he attains the age of sixty-five ... an old-age benefit."
It's commonly cited that in 1935 the average life expectancy at birth was less than 65, so the average newborn would never actually collect benefits. Some say that's what originally made Social Security a viable program.
Social Security's website takes on this claim in its frequently asked-questions section. Under the question, "Is it true that life expectancy was less than 65 back in 1935, so ... people would not live long enough to collect benefits?" the site answers:
Not really. Life expectancy at birth was less than 65, but this is a misleading measure. A more appropriate measure is life expectancy after attainment of adulthood, which shows that most Americans could expect to live to age 65 once they survived childhood.
That's true, but it leaves out the most important details.
When apples meet oranges
Thanks to 1983 Social Security amendments, those born after 1959 can receive full benefits at age 67. Recent actuary tables show the average American that makes it to age 18 -- the age most will likely start paying into the system -- can expect to live another 60.2 years, to age 78. So those who make it to adulthood can expect to collect Social Security benefits for 11 years -- from age 67 to 78.
This was hardly the case when Social Security was enacted in 1935. Alas, a 1935-specific actuary table couldn't be found, but there is one from 1930. It shows that those who made it to age 18 around 1935 could expect to live for another 48 years, to age 66, meaning they could expect to receive Social Security benefits for just one year.
Even when you consider life expectancy for those who actually reach full retirement age, the divergence is large. Those who reach age 67 today can expect to live another 18 years. In 1935, the lucky soul who made it to 65 could plan on living another 12.4 years.
Here's what's important: Retirees today can expect to receive benefits for about five and a half years longer than those who made it to retirement age in 1935.
That might not sound huge, but it's big enough that if it were adjusted appropriately, you'd darn near eliminate Social Security's deficit. The CBO estimates that if the full-retirement age was increased from the current 67 (for those born after 1959) to age 70, the Social Security Trust Fund would remain intact for an additional 35 years beyond its projected insolvency date, which is 2037 under present assumptions. Adding another year or two would likely push the insolvency date out to something well beyond 2080. And that doesn't assume changes to the way indexed benefits are calculated, as mentioned above. Apply a fraction of each proposal, and you've fixed Social Security.
Not a bad problem to have
Unfunded pensions aren't just a government problem. In 2008, Ford (NYSE: F ) Goodyear Tire (NYSE: GT ) , OfficeMax (NYSE: OMX ) , and even ExxonMobil (NYSE: XOM ) had underfunded pension obligations. Airlines like Delta (NYSE: DAL ) , Continental (NYSE: CAL ) , and AMR (NYSE: AMR ) are well known for being pension problem children.
Some of this is the result of poor planning. Some of it is due to a crashing stock market. But a lot of it is simply the fact that we're living longer than before. As Roger Lowenstein wrote in his book While America Aged, "All financial debacles have a human element -- greed or self-delusion or perhaps sheer dishonesty. In this one, retirement systems fell prey to a basic part of our nature." We just got too darn old.