Many of today's millennials were told -- from an early age -- that Social Security would be insolvent when they retired. A 2014 Pew survey found that 51% believed they would receive no benefits whatsoever in their golden years, while just 6% believe they'll get benefits at their current levels.
But how many have a firm grasp on why Social Security is expected to deplete its Trust Fund sometime around 2035? There are lots of theories out there. Some believe it's a giant pyramid scheme that's bound to collapse. Others say the government has been borrowing from the Old Age and Survivor's Insurance (OASI) Trust Fund for years without paying it back.
But those explanations are often mired in a massive misunderstanding about how Social Security's funding works. The truth is, Social Security has always been a pay-as-you-go endeavor, which is what makes it seem like a pyramid scheme.
And the Trust Fund has been invested in special U.S. government bonds that are legally bound to pay a certain interest rate and repay all of the principal upon maturity. If the money just sat in a bank account, its value would be eroded by inflation.
As Steve Vernon, a research scholar at Stanford Center on Longevity, wrote in 2012: "This process has taken place in full view of anybody who cared to learn about it. There have been no smoke-filled rooms where politicians sat around divvying up the earmarked money in the Social Security trust to finance their pet projects."
So, why is Social Security in so much trouble?
The answer to this question is actually a lot simpler than you might expect: There will soon be more retirees than the nation has ever seen -- especially in proportion to the number of workers who are paying into Social Security.
Back in 1940, there were just 1.1 million beneficiaries of Social Security, and 46.4 million workers were paying into the system. In other words, there were about 42 workers supporting every retiree.
But look at what's happened since then.
Note that all of the data after 2010 comes from predictions from the Social Security Administration.
The key shift started between 2005 and 2010 -- that's when you see the red line start to shoot up at a much more rapid pace. That's because the first Boomers -- who were born in 1946 -- reached the age of 62 and started claiming their Social Security benefits.
Before this, roughly three workers supported every retiree. By the time the last Boomers retire in 2034, there will only be two workers supporting every retiree. That may seem like a small change, but in reality, it means that one-third of the funding is drying up.
What options are there to fix Social Security?
There's no shortage of ideas on how to fix Social Security, but they all boil down to three general categories:
- Taxes need to be raised to help meet the expected shortfall in the 2030s.
- Benefits need to be cut to reflect Social Security's current level of sustainability.
- Some combination of the two above.
I have no idea what will happen to Social Security in the future. But the fact remains: The surest way to make sure you will be taken care of in retirement is to start saving and investing money now. Nobody cares more about this than you, so the sooner you start, the better.
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