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The Past, Present, and Future of Social Security: Will it Run Out?

Updated on November 30, 2014

Social Security Funding

In 2011, it was reported that the Social Security program is the largest expenditures for the United States taking up $700B out of the government’s estimated $4 trillion budget. Social Security accounts for 37% of the government's total budget. In 2011, the Social Security Administration paid nearly 60 million people. Nearly 40% of individuals are dependent upon this benefit for 90% or more of their income during retirement, which means this benefit keeps many people out of poverty.

In 1935, President Roosevelt’s administration signed the Social Security Act into law. The intent of the law was to create a safety net for American workers and their families in the event they became disabled, retired, or passed away. Under this system, workers contribute a portion of their salary to financially protect themselves in the event that one of the above situations occurred. Although, there is good intent behind this program, it has become one of the major topics of conversation in the United States.


How it Works?

Social Security is primarily funded through individuals’ payroll deductions. When individuals are employed, then the individual is able to pay into social security. Deductions are taken and one of those deductions is the Federal Insurance Contributions Act (FICA) tax, which is withheld from each paycheck. Those taxes are held in an interest bearing account known as security trust funds. The government owns these accounts, so these accounts are usually low interest, but are considered to provide better protection compared to private stocks. Individuals are entitled to receive this benefit in a monthly check once he or she retires. The amount received is dependent on how much an individual contributes to the account during his or her lifetime.


Sustainment Challenges

There is some concern with the future direction of this program. The main reason for the concern includes the ratio of those receiving the benefit to those contributing has changed drastically over the years. In 1940, the ratio was 159.1 contributing to 1 receiving social security. Since the Baby Boomer generation to today’s Generation Y the number of individuals has drastically declined due to people living longer and collecting more social security benefits. In the 1940s, the life expectancy was estimated to be in the early 60s for men and women. Today’s life expectancy is in the late 70s for men and early 80s for women. Basically, social security is taking more money out than what is being out back in the pot.

Research shows that by 2030 the ratio will be 2:1. There are nearly twice as many older Americans, which puts the program at major risk. The social security trust fund will not be in surplus, but will go into the red. Most people agree that social security is not sustainable without some type of reform. There have been several proposals on social security reform, but none of the plans have come to fruition.

The Way Ahead

One of the proposals is to privatize social security. The purpose of privatizing social security is to allow for individuals to have control over their retirement funds and prevent financial shortfalls. In theory, if individuals have control over their own money, then he or she is able to invest in the stock market and have the potential to earn a higher return on investment compared to investing in traditional government funds. However, one could argue that although the return on investment is higher by investing in stocks, it is also is very risky. Individuals have the potential to lose some or all of their savings by investing in a higher risk stock.

Although, there is no clear answer to the future of social security, there is a clear answer that something needs to happen to improve the program. Without reform, there may be a major impact on the program itself and retirees. The program itself can face major cuts, increase in tax contributions, or increase in the retirement age. If this happens, there may be a serious impact on low-income workers. This will leave low-income workers worse off and may require for the government to provide other financial support (e.g., welfare). By not taking on this problem, this can serve as a catalyst to break this country's economic stability.


Estimate Your Benefits

Will you have enough money to retire? Do know what your social security benefits will look like when you retire? If not, it is pretty easy to calculate your social security benefits. The Social Security Administration provides a Retirement Estimator that gives estimates based on your actual Social Security earnings records. Keep in mind, it is an estimate and you won't know what you are actually entitled to until you apply for benefits at Social Security Administration. You should not solely depend on social security to financially support yourself; instead you should figure out how much money you will need from other funding sources to live comfortably when you retire.

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