Will Social Security Last Through Your Retirement? Will Your Benefits be Reduced?
May 19th, 2009 by Skip McGrath
Here is a great article from Nilus Mattive from Money and Markets that sets out the current and long-term problems with Social Security. We Geezers will probably be OK, but a generational war could be brewing. I shared this article with my two sons (age 25 and 30) They both said: (A) They don’t think they will even see social security, and (B) They have no desire to pay for it. With baby-boomers retiring at the rate of 14,000 per day and soon to increase to over 20,000 per day, this could become a critical issue over the next 5 to 10 years.
Social Security Situation Worsening; What to Do?
by Nilus Mattive
We got lots of disturbing news from Washington last week. But the latest updates on Social Security and Medicare really got my blood boiling.
It is now estimated that both programs’ trust funds will run out sooner than previously expected. In the case of Medicare, the date is 2017 rather than 2019. For Social Security, it’s 2037 rather than the previous estimate of 2041.
Both programs are suffering because of the recession. The simple explanation is that fewer jobs mean less money getting paid into the systems. That creates a bigger drain on the programs’ current resources.
But it merely highlights the larger issue, one that has been there since the very beginning of Social Security.
The Problems with Pay-As-You-Go …
It’s interesting – and very instructive – to look at the history of the U.S. Social Security system.
The program’s first payment reportedly went to Ernest Ackerman. He retired a day after the program began, and contributed a whopping nickel. His lump sum payout? Seventeen cents. Not a bad return for good ol’, Ernie!
Ernest Ackerman put in one nickel to Social Security, retired a day later, and got back a $0.17 lump sum payment. Need I say more?
Meanwhile, the first person to receive a monthly payment from Social Security was Ida May Fuller. During the late 1930s, she contributed $24.75 into the system. Her initial monthly check was $22.54, so by her second check, she had more than recouped her entire investment!
And get this: She lived to be 100 years old, collecting $22,888.92 out of the system over her lifetime!
Sure, it’s an extreme example. But it demonstrates the real problem with Social Security … the problem that has existed since day one … and the problem that is only worsening as more and more people live to Ida-May-Fuller-like ages …
Social Security’s pay-as-you-go structure means a never-ending game of catch up.
When Social Security was first instituted in 1935, it covered about half of the population. Many teachers, nurses, librarians, and other workers were excluded from coverage. What’s more, the average life expectancy was about 60.
Today, Social Security covers virtually everyone. The average American is living to age 76.
And to accommodate this widening gap of money coming in and money going out, the initial 1937 payroll tax rate of 2 percent (split between employer and employee) has already risen to a combined 15.3 percent (including Medicare taxes).
Yet, I’m sure it will absolutely have to go much higher if the system is to survive!
Reason: Based on the newest projection, Social Security will begin collecting less money than it pays out in 2016.
Odds are also extremely good that the current cap on the amount of a salary that is subject to Social Security taxes ($106,800 in 2009) will have to be raised or completely eliminated.
And all of this begs additional questions …
Will Social Security Benefits Be Reduced? Or At Least Taxed?
Should You Start Taking Payments As Soon As Possible?
I believe Washington’s preferred solution will be getting more money into the system. But I would not completely rule out some tinkering on the payout side, either.
Taxing benefits at the Federal level has been one idea bandied about. That would be a slightly less obvious way of reducing future recipients’ payments.
Continuing to bump up the age at which benefits begin is another, and by the time I retire, I’m sure the age will have increased substantially.
But I would say that if you are near – or already in – retirement, you shouldn’t worry too much about your payments.
In fact, despite Social Security’s problems, I still suggest you consider delaying your benefits as long as possible. Sounds counter intuitive, I know.
After all, the conventional wisdom is to just start collecting as soon as you can. This is both because of the aforementioned problems – i.e. “catch as catch can” – and because it is commonly believed that the system is designed to work out the same no matter when you begin collecting.
But let me explain my logic here …
I think near-term Social Security recipients have little to worry about. Everyone else? I shudder to think …
First, it would be political suicide for anyone in Washington to mess with near-term benefits. Instead, the preference will remain – as it always has – kicking the buck further on down the line. Can it continue this way forever? No. But for longer than it probably should.
Second, there are also logistical problems with changing soon-to-be-retirees’ benefits. After all, the government uses formulas to calculate benefits at age 60 and 62 for each recipient. They are unlikely to retool the entire process overnight.
Third, it’s true that the system is designed to pay out the same in total benefits no matter when you start collecting. But the calculations are obviously based on averages and you are anything but average!
It’s important to look at your individual situation before you just accept the conventional wisdom. Sure, if you need the money to live on then just take it. But if you can delay taking your benefits, it might be worth your while, especially if you have “longevity genes” in your family.
After all, the Social Security Administration will raise your future payments for every month that you delay. Annually, that will amount to an 8 percent increase (plus any cost-of-living adjustments).
So the longer you delay taking benefits, the bigger your monthly benefit.
The math differs for every person, but consider someone who’s age 66 and has the choice of collecting $2,000 a month for the next 12 months or an additional $160 every month starting a year from now (i.e. the 8 percent annual increase for delaying benefits).
The $24,000 upfront seems like the better option. Especially since it takes 12 ½ YEARS of payments to make up for that missed $24,000.
Yet according to government statistics, the average American at age 66 will live another 17 ½ years.
In other words, you stand a very good chance of collecting at least another five years worth of those extra $160-a-month payments. That comes out to another $9,600 in your pocket!
So yes, Social Security is riddled with problems. And yes, it may not be around – or paying out nearly what it will hand near-term retirees – by the time I’m collecting my checks.
We will also all face higher taxes in the near future if the system is to be “saved.”
But there are still plenty of things that you can do to get more of your money back out of the system. Don’t feel guilty about it. Don’t worry about it. Just educate yourself on all the options and possibilities and take advantage of every little advantage you can.
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Tags: extra money, retirement income, retirement money, social security running out
Usually I do not make comments on blogs, but I have to mention that this post really forced me to do so. Really terrific post
i was starting to think that i would probably end up being the only young woman which cared about this, at the least at present i know i’m not ridiculous
i’ll make sure to take a look at some other blogposts right after i get a bit of caffeine in me, it is really tough to read without having my coffee, I was until the wee hours of the morning last night grinding facebook poker and after getting my fill with a few brewskies i finished up burning off all my facebook poker chips adios for now 
One thing you have overlooked: Congress has been stealing from SS for years. I paid 7.5% off the top of every paycheck. If they would leave the system alone, it seems quite probable that it could be self-sufficient.
I agree w/one of the writers. Congress and the likes have stolen billions over the years to balance the budget from SS. If you research it, Pres. from Nixon and probably before until Geo. the Moron to pay for wars, etc. Then you have the SSA funds which (I am not sure here) but think that money comes from SSA that goes to every little whimpy cause because da whiners know they can get money for nothing if they just fake it or have kids out of wedlock. The states are famous for this as well at least mine is. So here’s the krapper: you save and invest through the market and that gets stolen too! Time to buy a new…
[...] couple of months ago I had a guest Post by Nilus Mattive titled: Will Social Security Last Through Your Retirement? Will Your Benefits be Reduced? It has been one of the most-read posts in this blog and I continue to get lots of email from fellow [...]
Social Security is taxed and has been taxed for years. SS is payed to all the non-working lazy assed people who come to the US knowing they can get it with ease. So, only those that put in should be the only one to get it back and put tight purse string the system.
I started collecting at age 63.I feel for those who are paying into SS (for me and others)and will never get it. Those who stole from it for their pet projects should have to forfeit theirs.Sounds like a Madoff scam.So do not punish those who did not steal from the SS.We paid into it and it is ours.You stole from it,so replace it!Cut off foreign aid (60 billion) to those who do not like us,for a starter.Pay for your own healthcare and myriad perks you Congress people get.We trusted you to do the right thing,so do it! I have to go I am getting my “Italian up”
History: SS was originally protected from raiding by congress. Under Pres. Johnson the vietnam war ate up a big chunk of tax money. To finance the social programs under the “Great Society” movement. Congress changed the rules to allow borrowing from SS. Since the federal government never pays back principle on any loan it takes out “treasury notes”, only interest, it amounts to theft of SS. By definition taking something with no intent to repay is called “theft”.
The level of ignorance, racism, xenophobia – not to mention bad grammar and atrocious spelling and punctuation – in some of these posts must make the authors grateful there’s no quiz before they get a check. Some of you would be broke. There’s so much crazy here. Allow me to deconstruct just one post:
“SS is payed to all the non-working lazy assed people who come to the US knowing they can get it with ease” is completely false on every level. Social Security is not “paid” to anyone who hasn’t “paid” into the program for ten years at a minimum. Social Security Disability Benefits are paid to younger workers who may have a shorter employment (and hence pay-in) period depending on their age but the eligibility requirements are very strict and the application process can take years. So, “non-working” – wrong. Gotta work for a long time: don’t forget that’s 10 years worked but you still have to be at least 62 to collect any retirement benefits under Social Security. “Lazy-assed” – wrong again: more like workin’, workin’, workin’ all those years. Then we have, “Who come to the US knowing they can get it with ease” – is the most foolish assertion of all. You can’t work (legally) unless you are a legal resident of the United States with a green card. If you are working under the table, you’re not paying into Social Security and thus not entitled to collect anything from it.
Which, if what I can try to understand from your parting shot, Bill, when you said “only those that put in should be the only one to get it back and put tight purse string the system” is in fact the way it works: only those who contribute get paid. So, other than sharing your dislike of people who, on the whole, work much harder than do native-born Americans, doing jobs Americans won’t do, and usually for lower wages OR who emigrate here and have highly skilled jobs like designing software for Microsoft, hopefully at higher wages than they’d make at home and who thus pay high taxes to the United States atop their Social Security contributions, what have you said?
Social Security will never go away. It can and should be tweaked to reflect different realities from those that existed during the Depression when it was set up, but no Congress will face the electoral wrath of the more than 50 million Social Security beneficiaries, most of whom are not disabled, just older and who vote at rates far higher than the population at large. And how do they vote? Against anyone who tries to decrease or even limit their benefits, that’s how. Trying to cut benefits (especially to the Tea Baggers) would be political suicide.
Any shortfall issues would disappear if the cap on earnings taxed were removed. Mr. Blankfein at Goldman Sachs made $330 million dollars last year. Why should he only make Social Security contributions on the first $106,800 of income? But of course, Congress is afraid of the rich who pay for their campaigns, so that won’t happen either. And those 20-somethings who think it’s a crock? When they begin to realize that after paying their college loans and their mortgages and then the college tuition for their kids that they’ll then have to start supporting their aging and impoverished parents, well, the clamor to increase Social Security benefits will be louder than anything you’re hearing now about reducing them.
I’m 60. I’ve been hearing about the imminent collapse of Social Security since I was in my 20′s. It’ll be here until I die and I plan to live a long, long time.
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