BLOG: Social Security - Too Big to Fail?

Based on our informal Facebook poll last week, the majority of the respondents (22 of 25) believed that Social Security would not be around when they retired.  While they might be right (none of us has a crystal ball), I tend to believe that it will be around in some fashion.  I have formed this view not only from personal experience but also from a few scary statistics.  According to the Employee Benefit Research Institute in 2011, Fifty-six percent of American workers have saved less than $25,000 for retirement, and 46% have saved less than $10,000.   At this point in the lifecycle of a government entitlement, which was signed into law by FDR on 8/14/1935 (see http://www.ssa.gov/history/hfaq.html), the benefits have become not only a safety net but also an expected part of retirement income.  Let’s also not forget that as the number of pension plans continues to be reduced, the onerous is on the worker to save for retirement.

Let’s take a look at what got us into this mess. For all workers, who earn a paycheck, 6.20% of wages up to $110,100 in 2012 is taken from their pay and paid to the Social Security Administration.  These Social Security dollars are used to pay current retirement benefits; however, as the baby boomers start drawing benefits, the number of workers left in the work force will diminish.  So in essence there will not be enough money being paid in to cover the benefits being paid out. 

Here is my guess (and it is nothing more) of what will happen.  With the falling number of workers vs. number of retirees, one of two things will have to happen, if not both:  1. Social Security Taxes will go up and/or 2.  Social Security Benefits will be reduced.  Some of this we have seen already with the increasing of the Social Security Normal Retirement Age from 65 to a higher age based on your birthday. 

Unfortunately, I am fairly certain this problem is one of the most critical of our era.  To my knowledge, there has not been any consensus on how to stabilize this system so it doesn’t become insolvent.  It amazes me that we are not seeing any urgency out of Washington on this issue.  At some point a decision will be made, I would like to see it be done sooner rather than later, so we can all know whether or not we will enjoy our Social Security Benefits.