What Does The Future Of Social Security Really Look Like?

The mid-term elections have brought a lot of issues back to the forefront of the political discussion lately.  A lot of it centers on how we’re going to pull ourselves out of the current recession.  While financial topics like taxes and government stimulus tend to dominate much of the conversation, one matter that has resulted in much discussion in the past has been relatively quiet recently – the future of Social Security.


Everybody’s heard horror stories about what is happening or is going to happen to the Social Security program.  It’s about to go bankrupt.  It won’t be there at all when you retire.  Your taxes are going to be raised to fund it.  Let’s take a step back and try to separate some of the facts from the fiction that is out there right now.

Is Social Security going bankrupt?

The short answer is not any time soon.  Based on what the system is currently taking in and paying out, the fund would be depleted around the year 2040.  Both the government and the public have a high level of interest in making sure that the system can be sustained over the long term so expect significant changes to be made in order to keep it funded.  As long as the government continues to collect payroll taxes, the system will never truly go bankrupt but benefits would likely look a lot different than they do today.

What changes can be made to keep it solvent?

The Social Security system is going to need to figure out a way to maintain the surplus necessary to keep paying out scheduled benefits.  The main ways to do this are to either increase payroll taxes or decrease benefits.  The government has committed to preserving benefits for current or near retirees but what happens for younger workers is still to be determined.  The other solution is to try to increase the return earned on current funds by moving some of it into the stock market or by offering workers the option of self-investing a portion of their own accounts, otherwise known as privatization.

Will it be privatized?

This idea was originally proposed by President George W. Bush during a State of the Union speech.  While privatization still remains one of the options on the table, the idea has never really gained much traction.  Likewise, the option of moving some of the trust fund over to the stock market to try to increase returns hasn’t really gone anywhere either due to the recession and the recent performance of the market.

How will these potential changes affect me?

For anybody over the age of 50, the answer is they won’t.  As mentioned already, the government has said it will keep planned benefits for this group unchanged.  Younger workers though can likely expect either a tax increase or a cut in scheduled retirement benefits at some point in the near future.  While a complete bankruptcy of the system is highly unlikely, the impending deficit of the system is very real and will need to be addressed sooner rather than later so smaller changes now can produce bigger results in the future.

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Author Info

This post was written by David Dierking. David lives outside Milwaukee, Wisconsin and has been working in the financial services industry for over 13 years with a background in investments, accounting, and marketing. He earned his Chartered Financial Analyst designation from the CFA Institute in 2004 and was recently published in the Milwaukee Business Journal. You can also check him out at The Ultimate Fit Challenge

4 Responses to “What Does The Future Of Social Security Really Look Like?”

  1. tom |  Nov 04, 2010 at 11:49 am

    I hope they cut benefits for my generation (Gen Y) and increase the retirement age to 73, not 2 months every year until it reaches 67! They should also be looking to shutdown SS for anyone making above X times the poverty line (no idea what X should be).

    The argument against that is that people are working longer and putting in more hours. It will negatively affect those who are in physically demanding jobs… blah, blah, blah.

    If those people are looking out for themselves, they should also be saving money for retirement in their own personal accounts. If they are working longer, then they are putting more in their own retirement accounts anyway!

    If Gen Y isn’t saving their own money and depending on the Gov’t to get them through their golden years, they are idiots. Social Security is a broken system and might not even be around when we retire (or at least completely different). Everyone entering the workforce now needs to be looking out for themselves. Take some personal responsibility for your life and finances.

    End Rant.

  2. lucas |  Nov 07, 2010 at 12:09 am

    You said, “Based on what the system is currently taking in and paying out, the fund would be depleted around the year 2040.” Presumably, by “the fund,” you mean the Social Security Trust Fund established in the 1980s to take care of the baby boomers. By 2040 both the fund and the most of the boomers will be gone, just as planned. Then Social Security will revert to its original pass-through design which may or may not be able to pay 100% of the promised benefits, depending on a number of variables.

    There is the separate issue that the trust fund was invested in Treasuries, which is tantamount to the government borrowing the trust fund. Bush famously called the trust fund a bunch of worthless IOUs (ie http://www.msnbc.msn.com/id/7393649/).

    As far as investing Social Security money in the stock market, the first rule of investing is do not invest money you cannot afford to lose. Social Security was set up as “insurance” against abject poverty during retirement, so obviously it is money that cannot afford to be lost (as are most people’s non-Social-Security retirement savings). Although the historical annual returns of the stock market are 6-12% (depending on who is doing the talking), the historical annual returns of individual investors is 1%, through herd behavior or investment fees (http://www.theskilledinvestor.com/ss.item.1/excessive-investment-costs-are-a-huge-problem-for-individual-investors.html). By comparison, Social Security’s 3% with no risk to the principal looks pretty good.

  3. Rimaye |  Nov 21, 2010 at 8:53 pm

    Lucas makes a lot of good points. However, the statement that investing the trust fund in treasuries is “tantamount to the government borrowing the trust fund” is misleading although true. As you said, “it is money that cannot afford to be lost”, so the trust fund should be invested in the most secure place it can be – and the fact is, that place is U.S. government debt.

    Look at it this way: if the government defaulted, most firms and a good many foreign governments would probably go under, too, because of the size of the economy, the U.S.’s status as the world’s consumer and the dollar’s status as reserve currency.