why social security is still going bankruptSocial Security is in dire financial straits, but that's nothing new for this long-troubled program.

Social Security spent $49 billion more in 2010 than it took in as tax collections. By the time 2011 ends, it expects to outspend collections by another $46 billion. At this rate, the program's much-touted "Trust Fund" is expected to be depleted by 2036; without that fund, benefits are expected to fall to about three-quarters of current promised levels.

As bad as that may sound, it's actually business as usual. To cover the massive obligations of the plan, tax rates have risen repeatedly over its history. What started as 2% of the first $3,000 of income (half paid by you, half by your employer) is now scheduled to be 12.4% of the first $110,100 of income in 2012. On top of that, the "full retirement age" is creeping up from 65 to 67, which effectively means younger workers will be paying more for a longer time to get their full benefits.

Even with repeated efforts to shore up the program by raising taxes and cutting benefits, Social Security's collapse seems virtually inevitable.

The Perils of Aging

A huge part of the problem is driven by demographics.

  • People are living longer and having fewer children. Those who were born in and before the 1930s -- the era when Social Security got started -- simply weren't expected to live all that far into their 60s, much less past the retirement age of 65.
  • The American birthrate has fallen steadily, too -- from 18.7 live births per 1,000 population in 1935 to 13.8 per 1,000 in 2009.
  • To top it off, the economy has of course been less than stellar for the past few years, resulting in a smaller percentage of the working age population actually working. The civilian labor-force participation rate is down to 63.9% as of November 2011 -- down from 66.6% a decade earlier.

These demographic trends have been a long-term challenge for Social Security, the solvency of which depends heavily on having a large workforce supporting a small number of retirees. The economic weakness only makes it worse.

About That "Trust Fund"...

Now that Social Security is paying out more than it collects in taxes, another problem with its funding mechanism is becoming apparent.

The Trust Fund is something of an accounting fiction, stuffed with U.S. Treasury debt. The taxes collected have long ago been spent, with any Social Security-specific surplus collections going to fund other programs.

As Social Security no longer provides surplus funds to the Treasury, its deficit is something of a double whammy. First, the Treasury loses that source of revenue, and second, it needs to make up the IOUs being redeemed. That results in an even deeper general revenue deficit, higher taxes, and/or the need to lower spending on other government programs.

Put it all together, and the one thing becomes abundantly clear: Social Security won't last forever in its current form. The key questions are "What will change?" and "When will it happen?"

The Risks to Your Retirement

While nothing is certain until the laws actually change, those who are currently receiving Social Security will likely be spared the brunt of the changes. About the biggest risk facing current recipients is the potential that the "Cost of Living Adjustment" may be altered in a way that lowers the rate at which benefits are adjusted upward for inflation. Nobody is seriously talking about cuts to current recipients' benefits, just slowing the rate of growth for those payments.

It's those who are more than 10 years from retirement that have the most to worry about. If nothing changes, benefits will be forcibly reduced (in nominal terms, not just inflation-adjusted ones) when the Trust Fund's accounting value vanishes about 15 years after that point. People more than 10 years from retirement have a real chance of still being around to feel the pain of those reductions and/or of still working as taxes are raised to try to cover the shortfall.

If you are in the age group staring down likely substantial cuts in your future benefits, the sooner you get started saving to cover that gap, the better your own retirement can be. Start with these three steps you can take to improve your chances of winding up financially comfortable, even if Social Security does eventually fall apart completely.

Motley Fool contributor Chuck Saletta welcomes your comments.


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ajhnrthu74

if they would put back the money they took for all the people that they let into the country from foreign lands then there would be plenty of money and the money that is returned every day that goes into goverment general fund not social security then that would help and that is why they are running out and that is why they are trying to kill it so they won't have to put it back

September 30 2012 at 7:32 AM Report abuse rate up rate down Reply
CHUCK

If the Goverment keep their hand out of it and stop giving it to illegals their would be a lot more money in it.

March 01 2012 at 3:57 PM Report abuse rate up rate down Reply
scriptech1

Why is it that all we keep hearing about is Social Security's soon coming failure, when the US Government continues to foolishly spend billions of dollars every year that does not benefit its own citizens. Why is it we never hear about all the money borrowed from Social Security Trust Fund by the US Government that to my knowledge has never been repaid? That certainly put NO Trust in a Trust Fund.

February 15 2012 at 10:32 AM Report abuse rate up rate down Reply
sarcanz

Your facts are wrong. The Social Security system gets revenue from interest from its portfolio of treasury bonds as well as payroll taxes. See http://www.offthechartsblog.org/no-need-for-social-security-fright-on-this-halloween/. And the estimate that, without changes, the Trust fund will be depleted by 2037 is not new. The Fund's trustees said that in their 2000 annual report. http://www.offthechartsblog.org/what-to-look-for-in-the-social-security-trustees%E2%80%99-report/ And, even if the fund is depleted, SS could pay out about three-quarter of schedualed benefits from payroll taxes.

Sitll, we need more dollars going into the fund. A good way to do this would be to raise the dedution cap. Currently, anyone who earns over $106,000 pays no payroll tax on their income over that amount. So high income wage earners pay a much lower percentage of their income in payroll taxes than low income workers do. Raising this cap to about $166,000 would go a long way toward fixing the system's problems & keeping the Trust Fund from being depleted.

Of course, most Americans have no idea that the deduction cap exists. Maybe that is why our politicians & pundits, whol know about the cap -- and benefit from keeping it low -- almost never talk about raising it. It's so much easier to scare ordinary folks and raise the retirement age for people who work with their hands than it is to tell the the top 10% to contribute more.

January 13 2012 at 9:54 PM Report abuse rate up rate down Reply
MONTOOTH

One's retirement has always been in their own hands. Social Security, is an excellent program. The mistake of congress and the president at the time to borrow from its trust fund, was its undoing. However, unlike healthcare, Social Security's fix isn't as complicated as some would make it. We're living longer--o.k., raise the full-retirement age. We're unable to meet the current annual payouts--o.k., remove the cap of 106K on payroll. Congress is borrowing from the trust fund--o.k., put a lock on the box and remove the ability of congress to do so. The most important element in all this is to encourage, incent, praise, cajole and maybe REQUIRE working folks, to save, save, save and after they've done that...save some more. And with all the saving, they should invest some of it in solid securities. I am a high school graduate and this method has worked for me. Along with luck, grace, and the kindness of strangers, I am living a very wonderful retirement. God Bless America. Working together, we can acccomplish a new era of productivity, innovation and equity. Divisive comments, thinking and actions will doom our economy and our great nation.

December 23 2011 at 12:55 PM Report abuse rate up rate down Reply
mudforkgirl

what about ssi and all the illigetment kids they get big cks and food stamps and haven't workeda lick..

December 22 2011 at 6:58 PM Report abuse +1 rate up rate down Reply
Jo

Social Security was NEVER actuarily sound.......NEVER ! Then Pres. Johnson moved it from its fund to the General Fund so the gov't could spend it on other matters, ie. VOTES !!!!!!!!!!!!!!!! Below, someone mentions the SS Trust Fund. Repeat: Since Pres. Johnson, there is no longer a SS trust fund. Americans don't pay attention to Congress, and that is exactly why we are in such a mess. WAKE UP, AMERICA ! Know what your Congressman is doing; know, even more importantly, what your president is doing...this president has passed a thousand regulations, most of them KILLING jobs. The talk comes out of both sides of his mouth.

December 22 2011 at 5:02 PM Report abuse +2 rate up rate down Reply
switzd

To make things worse our Goverment is currently arguing over cutting the FICA tax by 2% while Social Security is not only going broke it is broke. Bucaus these same people have raided it for decaids. How can they conciously be arguing about passing a bill to re- enact it while at it's current rate there isnt enough coming in to fund it.

December 22 2011 at 10:21 AM Report abuse +1 rate up rate down Reply
RANDALL

ANSWER ....... STOP GIVING OUR MONEY TO THE ILLEGALS !!!!!!!!!!!!!

December 21 2011 at 11:48 PM Report abuse +2 rate up rate down Reply
malcolmshr

it sounds to me to meny hands in the cookie jar and no one returned anything!

December 21 2011 at 6:08 PM Report abuse +2 rate up rate down Reply