The "Future" of Social Security

The "Future" of Social Security is in doubt.

So this week I wanted to explore in depth the impact of the Social Security issue. I was inspired to write this from an extension of a highly-debated article written over at Free Money Finance. You can read his excellent article in its entirety [here]. To summarize, he looked at the impact of allowing workers take a look at contributing their own money into a fund rather than having the government do it for them. Turns out that the contributor would be entering retirement with a nest egg of nearly 1 Million Dollars! It may not sound like much, but imagine having a million dollars paid to you in retirement assuming that you would've paid off your house and car!

Well, back in Reality, it probably won't happen. Social Security after all is not a retirement program, but I'm not convinced that it's even security. The program is showing signs that it's no longer sustainable, and younger workers are all quite aware that they're paying into a system in which they will see very little benefit.

To illustrate, let's look at Social Security like a pot. You and your friends contribute a portion of your money into a pot, which will be distributed to older folks who have little or no pension and are too old to work—you don't want to put the elderly on the street. The system continues, so when you get older, you get to pull from the pot while younger workers pay in, and the cycle goes on. In theory, at least.

However, you don't get out as much as you put in because there are more people retiring than entering the workforce. More people living longer, and a shrinking ratio of workers are paying in. To exacerbate things, the money distributor (the US Government) decided that the program was working so well, that they can use some of the "surplus" money to pay for other things and write IOUs.

Well, that's the problem we have today. The ratio of those putting in vs. those taking out is shrinking. So the government has tried several "solutions" to keep the system sustainable. One example: raising the age at which you can take money out, and/or lowering the amount of money you can take out. These are only temporary fixes and you can see that as people live longer it gets harder to do that. And if you are a black male, the stats say you'll die before you're eligible to receive SS funds anyway.

Which is why I don't think it's that bad of an idea to allow younger workers to take a portion of their earnings and to place it in an account of their choice to collect a higher return on the money put into the system. At the rate we are moving now, we won't have enough "government security" to ensure any person any respectable amount of money in the future. And remember—government employees are on a totally different plan than most Americans, so don't expect them to take more than a cursory interest in your future.

So, as a younger worker, I encourage you to plan for your future as if the government will stick you with the raw end of the deal. Inquire about 401(k) programs as soon as you start working and also start contributing to IRAs before you budget yourself to a point where you "can't afford" to contribute. Then, if the feds do find a good way to keep Social Security solvent, you won't be depending on that government check.