Here’s how Social Security is supposed to work: You and your employer pay a portion of your wages (through mandatory payroll taxes) into the Social Security program, which is stored in a “trust fund” where they grow over time. Then, when you retire, you apply for your benefits
and collect a monthly check.
Maybe you think that’s how it does work? If so, I’ve got some bad news for you.
Here’s the thing: the money you contribute to Social Security doesn’t go into an account in your name. Rather, it goes into a giant pool of money that’s used to pay benefits to those who’ve already retired. In fact, the Social Security trust that funds your benefit has been running a deficit for a while now.
That’s what happens when expenditures exceed income. Rather than building up a balance to pay your future benefits, the Social Security trust fund is, well, in trouble:
In a sound retirement system, we would have $68.1 trillion in the bank earning interest – so that the funds would be there to pay the bills as they arise. In fact, we have no money in the bank for future expenses and there is no serious proposal to change that.
Unless you’re already collecting a Social Security payment, those “future expenses” mentioned above mean you.
But isn’t it our money? We paid into the trust fund – aren’t we entitled to at least get our own money back?
Bad news – “our money” is long gone:
In fact, the taxes the retirees paid when they were working have already been spent—virtually the same day they were collected. Nothing was saved for the future.
Right now we’re looking at a 25% reduction minimum.
(In that link, you’ll see a very sad line: “It is important that Congress act well before 2023 in order to strengthen the finances of the program as a whole.” Well, Congress didn’t, so here we are.)
Unless a miracle occurs in the next few years, that money is gone forever.
Social Security taxes aren’t “your” money
Ryan McMaken explains the legal and legislative precedents behind this grim fact, but here’s the bottom line:
I have bad news for everyone who sincerely believes the government lie and thinks they have some sort of claim to today's tax revenues due to a "promise" from the feds decades ago: there is no promise, no agreement, and you have no legal claim to money that was "paid in."
It's Not Insurance. There Is No Trust Fund. Your Money Is Gone.
This is because Social Security is not "insurance." It's not a "trust fund." It's just a tax and a welfare program. The money current pensioners paid in was spent on other people years ago. It's gone.
Feeling swindled? Me, too!
Now, we know that the Social Security program won’t cease to exist. The checks won’t start bouncing. Every American who’s paid as much as a dime in Social Security payroll taxes wants their money.
Congress has to solve this problem if they want to keep their jobs.
Fortunately, they’re our best and brightest, right? Our nation’s finest minds hard at work to salvage Social Security and make good on those promises to help fund our retirements?
The cure is worse than the disease
This is not a new problem. For decades, lawmakers have known Social Security expenditures have exceeded its income. They’ve been proposing various ways to solve the Social Security problem.
Unfortunately, none of their solutions are very good.
It’s the nature of the problem itself – they either need to collect more money, or spend less.
For example, the National Center for Policy Analysis proposed the following:
Workers (along with their employers) would save and invest 4 percent of payroll – eventually reaching the point where each generation of retirees pays for the bulk of its own post-retirement medical care.
I’m not a huge fan of paying more taxes to people did a bad job managing it the first time. On the other hand, “each generation of retirees pays for the bulk of its own…” makes the whole Social Security program seem less like a pyramid scheme.
Forbes published an article about the Four Most Promising Ways to Save Social Security Now. They aren’t exactly innovative – and all involve one common element that jumps right out at me...
- Increase payroll taxes.
- Increase the retirement age (so we’re forced to work for longer, paying more in taxes).
- Increase the maximum income level subject to Social Security taxation.
- Decrease taxes on Social Security income and cut benefits proportionally.
The first three? “Raise taxes.”
The fourth actually lowers taxes – but compensates by paying less.
Once again, it’s not rocket science – if there’s not enough money, you either have to increase income or decrease expenditures. Social Security’s “income” is taxes – and its expenditures are our benefits.
There is no way to solve this problem without infuriating nearly everyone.
Will Social Security survive? Probably, yes it will – too many Americans have too much at stake. Through some combination of raising taxes, lowering benefits and setting the bar higher (raising the retirement age, for example), Social Security will probably muddle through this crisis. And the next one.
Should we count on Social Security? Should we assume we’ll have some form of Social Security benefit to rely on in the future?
We must create our own financial security
It’s normal, even justified, to feel like we’re owed Social Security payments as a safety net for retirement. After all, you are paying (or did pay) your hard-earned dollars into the program.
But, as we’ve seen, our money is gone. Seems reasonable to expect that any future benefits will look different (probably quite a bit different) than they do today.
With luck, we’ll have some Social Security payments to supplement our income in retirement. As much as we contributed? Doubtful. As much as we expected? Also, doubtful.
Essentially, we are on our own in creating a stable and stress-free retirement. To say the same thing differently, we each make our own “Social Security” (anti-social security?).
Congress has known about Social Security’s looming bankruptcy for decades. They haven’t solved it yet. Since we can’t solve the big national problem, let’s turn our attention to things we can control.
By turning your focus towards things you can control and away from things that you can’t, you could become the hero who saves your retirement.
Peter Reagan is a financial market strategist at Birch Gold Group. As the Precious Metal IRA Specialists, Birch Gold helps Americans protect their retirement savings with physical gold and silver. Based in the Los Angeles area, the company has been in business since 2003. It has an A+ Rating with the BBB and hundreds of satisfied customer reviews.
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