The Independent Investor: High Noon for Social Security
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I'm 60 and a Baby Boomer. I've been working since I was 18 and have paid my Social Security payroll taxes every year since then so how come there is no money in the till now that I'm seven years from retirement? I took a look at how the Social Security system works. It explains some of it.
Both Social Security and Medicare are financed by virtually all the workers in America. The government takes 6.2 percent of each of our paychecks to pay the benefits of current retirees. There is a yearly salary cap, however. Right now the tax is limited to the first $106,800 you earn (if you make that much). If you make more you pay no payroll taxes on that extra amount.
The truth is that current workers like you and I have been overpaying into Social Security for years since there have been far more workers than retirees for many decades. The surplus payments we have made are used to buy special U.S. Treasury bonds that are part of the Social Security Trust Fund. But that era is coming to an end.
As baby boomers like me retire, the number of workers for each retiree will fall until eventually, the payroll taxes our kids pay won’t cover all of my promised retirement benefits. That is now expected to happen by 2016, at about the same time I reach retirement age. So no sweat, you say, all the trust fund has to do is redeem some of those special bonds right? Well, sure, but there's a catch. The government doesn't have that money.
Unlike a business that is required to have the cash available to pay off its bonds coming due, the government (read generations of our elected officials) has been dipping into that particular till for years. They have been spending our surplus payroll taxes (in addition to our income taxes) on their pet projects while promising to repay us "someday."
So whether it was The Great Society, the Vietnam War, NASA, $2,000 toilet seats or the bridge to nowhere, the simple answer is our government spent it so they will have to borrow more money or tax us to get it. By 2037, the fund will have used up all its bonds. At that point, Social Security will only be able to pay 78 percent of the benefits they promised us.
Past presidents have promised to fix the problem but found that the forces aligned against them were just too great to overcome. George Bush tried in 2005 when he suggested that workers set aside a portion of their payroll tax and establish a separate retirement account which would be self-managed. It was greeted with accusations of "political pandering," "fear mongering to the baby boomer generation" and declared irresponsible. In hindsight, given last year's market free fall and subsequent decimation of American retirement accounts in general, it was probably a good thing that Bush's plan ended up in defeat.
So what does President Obama have in store for us? Clearly, he means to address the issue and soon. I expect that within the next year or so I will be asked to pay more and receive less. You see, Social Security is not nearly as difficult to fix financially as Medicare (which I will address in a future column). If, for example, the payroll tax was increased by 2-3 percent and/or the present yearly income cap was expanded so that those who earned more paid more than the gap could be closed quickly. During his campaign, President Obama opposed reducing Social Security benefits but I suspect that option will certainly be debated in the House and Senate.
I guess what burns me most is that after 42 years of paying into my governmental "insurance program," I should have saved more than enough to retire without any problems. Instead, thanks to the mismanagement, misappropriation and outright squandering of my contributions, I'm going to be asked to pay all over again. And all that today's politicians will claim is that I should be blaming the politicians of past generations. Go figure.
Bill Schmick is a licensed investment adviser representative as well as a registered financial consultant. All views and opinions expressed by Bill in his columns are strictly his own. Direct your inquiries to Bill at 1-518-610-1553 or e-mail him at wschmick@fairpoint.net. You can also visit www.afewdollarsmore.com for more of his insight.
