Bleak Future for Social Security

This should not be a new issue to anybody, but the White House has released a report which predicts a grim future for Social Security.

Bush Administration Says Social Security Fix Lies in Cutting Benefits or Raising Taxes

WASHINGTON — The Bush administration said Monday the only way to permanently fix Social Security is through some combination of benefit cuts and tax increases.

That was one of the key findings in a new paper on Social Security released by the Treasury Department in an effort to achieve common ground on the politically explosive issue.

"Social Security can be made permanently solvent only by reducing the present value of scheduled benefits and/or increasing the present value of scheduled tax increases," the paper said. The Treasury paper said that while other changes to the giant benefit program might be desirable "only these changes can restore solvency permanently."

The bottom line is this, Social Security is a benefits funding mechanism that works as long as you have an ever increasing volume of contributors. The fly in the ointment is that the Baby Boomers are retiring now. That causes a double-whammy, in that people retiring go from paying in to taking money out.

Purely and simply, there is not enough money in the fund to pay all the earned benefits that retiring Boomers are eligible for and will likely live long enough to demand. So it is going broke, and quickly, too.

So the options are few. First, you can raise taxes to pay for the benefits, but the taxes in FICA and Medicare are already 15.30% when you combine the employee and employers portions. I don't think there is much more room left for more increases.

Here's what I think you will see:

1. Pushing back of the retirement age. People are living longer. Therefore they would take more money out of the system if the retirement age is not pushed back. That also gives you the double benefit of having people paying in longer and taking out for less time. They simply have got to have fewer people retire and more people pay in.

2. "Means testing". that is a fancy way of saying, if you happen to have any other assets, you will receive a greatly reduced benefit out of Social Security. this reduces the amount of many getting aid out in benefits.

3. Increasing incentives for private savings. I can see additional easing of tax laws for any private savings plans, so that future wage earners save more privately for their own retirements.

Bottom line is, some people have taken out a lot more than they ever paid in to the system. My own father has been receiving checks since he retired in the mid-80's, so he has received out of the system much more than he ever paid in.

Since there are no interest earnings in this system (the money you pay in goes out the next day in somebody else's benefits check), for the whole thing to balance some folks have to pay in a lot and take out very little.