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Some Thoughts on Social Security

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Today our local newspapers headlines were that the president was backing off from Social Security cuts in his budget which will be released early in March. As someone who receives Social Security, and also one hoping his own children will have a decent retirement which will include Social Security, it got me to thinking about the notion of Social Security in the first place. I have never been a fan of Social Security as I don’t think that is the federal governments business. I realize it has be

nefited many people. But that argument is past. This article talks of the financial problems Social Security faces.

Some history. Social Security was instituted in 1935 and then it covered about half the population. Some people such as teachers, nurses and others were excluded from coverage. Then the average life expectancy was about 60. Today, Social Security covers about everyone and the average American lives to 76.

The initial 1937 payroll tax rate of 2% (split between the employer and the employee) has risen to a combined 15.3% (including Medicare taxes) and the system still isn’t bringing in enough money to cover everyone. Social Security is a “pay-as-you-go” system, money comes and goes out fluidly.

I read an interesting article by Nilus Mattive (who worked on Wall Street for various research firms and is the editor of Income Superstars), and he gave these interesting facts. Social Security’s first payment went to a man named Ernest Ackerman. He retired a day after the program began and had only contributed $0.05. Yet his lump sum payout was $0.17, more than 3 times what he paid in. The first person to receive a monthly payment was Ida May Fuller. During the late 1930’s she contributed $24.75 into the system. Her initial monthly check was $22.54. So by the time she got her second check she had more than recovered her entire investment. She also lived to be 100 years old, and collected $22,888.92 over her lifetime. These are extreme examples, but they demonstrate the real social security problem that has been there from the start. And that problem is worsening.

This warning is found on the Social Security Administration’s website. Social Security is not sustainable over the long term at present benefit and tax rates without large infusions of additional revenue. There will be a massive and growing shortfall over the 75-year period. And not in a 75-year period either. In 2010, for the first time since 1983, Social Security took in less than it paid out. And by 2033, Social Security will only be capable of paying out 77% of benefits promised. This was a Ponzi scheme from the start. And to make matters worse, in 2010, as part of the tax package, Congress decided to have employees pay 2% less into the system in 2011, and they extended this legislation for 2012.

As of now the Social Security Trustees say we can expect to receive full benefits for the next 2 decades, but that is only because they will tap its trust fund, a bunch of IOU’s from various government agencies that borrowed the money back when the program had a surplus. Today those agencies will have to borrow the money to pay back what they owe. We are talking about a $7 trillion shortfall.

How many of you thought Social Security was a retirement fund? It was never intended to be one. It was always designed as a source of supplemental income. This can also be found on the agency’s website. Social Security was never meant to be the sole source of income in retirement. It is often said that a comfortable retirement is based on the “three-legged-stool” of Social Security, pensions and savings.

Today’s newspapers said the president had proposed a switch to a new “Chained CPI System” earlier, but that he was not going to include it in his budget. That indicates he has given up on trying to find a grand bargain to reduce deficits. What is a Chained CPI (Consumer Price Index) System? It is a fancy term for a hare-brained idea; benefit cuts that hurt seniors by reducing cost-of-living adjustments.

I’m afraid that the future for Social Security is very uncertain. I am advising my children not to count on it being there when they retire.

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