Will Social Security Be There For You?

by Larry Ferstenou


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Depending on the source you read, Social Security is facing a crisis in either 14 or 38 years. The difference between those two numbers can be attributed to the "trust funds." The issue is not the existence of these trust funds, but whether or not there will be any money in them when needed. For most baby boomers and those younger, the reality of the trust funds will spell the difference between a more secure or less secure retirement. It's an issue for which you should be concerned; but it isn't the only one. Here are four myths about Social Security that you may find surprising.

Myth #1: It's in the Constitution

Social Security is not included in the United States Constitution. It was a part of the Great Depression New Deal package of programs that President Franklin D. Roosevelt and his advisors conceived and presented to Congress. Their goal was to give America's hard working people "something to live on when they are old and have stopped working." Congress passed it in 1935.

Myth #2: An Account with Your Name on It

Many people believe the money taken from their paychecks for Social Security taxes (FICA) is placed in an account with their name on it. This account then becomes the source of their future benefits-like an IRA or other genuine retirement account. That is a myth. Social Security is an inter-generational program, meaning that today's workers support today's retirees. Such programs can be effective when there are several workers paying into retirement to support each beneficiary (called the worker-to-beneficiary ratio); however, if that ratio decreases, the program may not be able to sustain itself. Unfortunately, that is the direction we are headed.

The worker-to-beneficiary ratio has declined appreciably over the past 67 years and will continue to do so for decades to come. In 1945, there were 41.9 workers per beneficiary. Today there are only about 3 workers supporting each beneficiary and the Social Security Administration projects that the ratio will slowly decline to a mere 1.9 workers by 2075. It is this decrease in the ratio, as well as the fact our seniors are living longer, that is going to have the greatest impact on Social Security's insolvency in the future unless significant changes are implemented. Here is the bottom line. There is no account with your name on it collecting real interest and no guarantee that when you reach retirement age, the generation under you will be contributing enough to support your retirement benefits.

Myth #3: The Trust Funds

The Social Security taxes we pay today are funding the benefits of today's retirees. Currently, more money is coming into the system than is being paid out; hence, there is a surplus. Logically, one would expect that those surplus monies are being saved for the future in the trust funds just like you would save money in an IRA or other account to later take out and fund retirement. But that is yet another myth.

In reality, the trust funds are comprised of IOUs which the federal government leaves in return for borrowing that money each year to reduce the federal deficit (or for a couple of years in the 90s, to show a surplus). But beginning in an estimated 14 years, when those trust funds need to be tapped to start paying benefits to baby boomers, where is the money going to come from to pay the interest on and eventually redeem those IOUs? According to the Social Security Administration, the options are: "increased taxation, increased borrowing (i.e., the sale of more U.S. Treasury bonds to the public) and/or a reduction in other government expenditures." Other sources suggest a fourth option not mentioned above: a reduction in benefits to future retirees.

Myth #4: Full Benefits at 65

A fourth myth is that you will be able to retire and collect full social security benefits at age 65. Although most people don't realize it, the rules changed twenty years ago. From 1938, the age gradually increases to 67 if you were born after 1959.

Currently, workers can choose to start collecting their benefits at age 62, but they receive only 80 percent of what they would get if they waited until 65. In the future, that decreases even more. Those born in 1960 or later who choose to start collecting Social Security at age 62 will receive only 70 percent of what they would get if they waited until age 67.

The Impact on Your Future

Myth #1 is an interesting fact, but not something you need to worry about. Expect Social Security to be around for a long time, even if it's not guaranteed by the U.S. Constitution. But Myths #2, #3, and #4 are cause for concern. You may have learned from this article that your Social Security benefits are not set aside and reserved in your name, but will depend on the generations under you. That group will not be large enough to support you in the same manner that our seniors are being supported today. You probably also learned that you could be retiring one or two years later than anticipated. But most importantly, you should now be aware that your Social Security benefits may be less than you expect.

The question for most of us is this: Can we depend on Social Security to provide significant financial support in our retirement like it is for today's retirees? The answer depends on whether or not you believe the trust funds will be there for you.

For more information on the myths exposed herein, try the SSA's Web site at www.ssa.gov.


Larry Ferstenou retired at age 42 and is the author of You CAN Retire Young: How to Retire in Your 40s or 50s Without Being Rich. Copyright © Larry A. Ferstenou

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