Why Social Security Is Going Broke: Two Simple Charts

In 1940, the required age to receive full benefits from Social Security was 65. According to chart below, most people didn’t even reach 65 at that time. Today, average life expectancies are over 11 years longer (and still rising), yet the full retirement age is only 67. That’s a lot of people getting paid out.

The way Social Security works, taxes from current workers go straight to paying for the benefits of current retirees. Your money is not being “saved” anywhere to be withdrawn later. In 1950, there were 7.3 working-age people for each person over 65; now, the ratio is 4.7 to 1, and it is scheduled to drop to 2.7 to 1 by 2035. That’s a lot less people paying in.

These alarming demographics don’t help Medicare either, which has even more problems! The idea of having everyone work for 40 years and then retire for 20 years is going to be very hard to sustain.

The above information was taken from the 2003 paper Demographics and Capital Market Returns, which as the title suggest also talks about the effects on future stock market performance, as well as proposing some potential solutions. Found via Capital Ideas.

Comments

  1. I think eventually the government will raise social security taxes rather then cut benifits.It looks like medicare is going to be the the first big social program to start sinking.Does anyone remember the movie Logans Run?

  2. So what we are saying is that the government hasn’t been able to run social security or medicare effectively and now a portion of the population wants it to run the entire health care system?

    Only in government can a project be an abject failure and they want to expand it.

  3. Well, i think obesity of Americans will level the playing field with decling life expectancy in 10 years

  4. The government will have to raise the retirement age, reduce benefit payments and raise social security taxes. Unfortunately all politicians have no back bones and they continue to sit idle because they don’t want to be known as the politician that cut your benefits. So, they act like there is no problem and continue to kiss little babies while hoping the issue does not blow up while they are in office. Or they are complete idiots and have no clue of the problem.

    The best analogy of this situation is when someone is driving a boat and then sees a major obstacle in the far distanced. If the decide to make adjustments early, they will only need to make minor changes where people on the boat will almost feel no affect. However, if they wait to the last minute, they will need to make drastic changes that will be painful for everyone and will likely not work.

    And yet, the people continue to think the government can solve all of our problems. Our government is telling the people that they are smarter individual Americans and the open market and they can solve the complicated health care issue, but all they need is $1 trillion to do it. The “Government can solve all of your problems” platform is very similar to Lenin and the Bolsheviks in communist Russia, Mussolini in fascist Italy and Hitler in Socialist Nazi German.

    The X and Y generations are the individuals who will be squeezed due to the current and previous politician’s impotence to solve problems. Individuals who read blogs like this are the ones who have to sacrifice since they took their financial matters in their own hands and will be told that they will need to take care of the less fortunate.

  5. I am not an expert, but there are laws regarding private pension plans (ERISA) which is under the authority of the US Department of Labor. I would suspect that if Social Security were subject to the same laws it would not be close to being in compliance. Could you imagine this conversaiton… “Hey dude, where is my pension”… “Umm, well that money you paid in, ahh, well, we used some of it to pay benefits to the folks already retired, and the rest, we, ah, well we just mixed it in with the general fund and used it for things like education, welfare, highways, military… you know, everyday expenses…”

  6. Comment above said “The government will have to raise the retirement age, reduce benefit payments and raise social security taxes.”

    True. And doing those things could return the program to technical solvency. The problem is, the program is already a horrendous deal for young people entering it today. A few of those “tweaks” and people coming into the system will be looking at guaranteed negative returns over their working lives. So how is that any better than just having people buy disability insurance and then put the rest into a plain ol’ FDIC-insured savings account? Why in the heck are we running a multi-trillion dollar mess that just takes peoples money and gives them back less years later, if they even survive to collect it? And for people who do die around retirement age, there is no inheritance to pass on. The system is a total unfair joke.

  7. The stupid in the comments hurts.

  8. nyarrow says:

    Doesn’t the life expectancy chart you published include childhood mortality? There has been a drastic decrease in childhood mortality since the 40s, which would both help (more workers) and eventually hurt (more retirees) social security and welfare. A better comparison would be the average adult life expectancy to the full benefit retirement rate…

  9. Warren summed it up.

    The reason SS is going broke is because it’s run like Ponzi Scheme with some Enron thrown in. Point blank. Madoff is in jail for running what was essentially a private Social Security Fund. It is illegal for any company to do what our government does with the money that comes in:

    1. Money in SS taxes comes in
    2. Current benefits are paid.
    3. Extra money is put into the general fund to spend on other government obligations.
    4. A US Treasury bond is put into a file cabinet (the “trust fund”) to cover the amount put into the general fund (the government basically issuing ITSELF and IOU).

    How the hell can this be OK with anyone? This is Enron and Bernie Madoff all rolled into one and yet people defend this scheme tooth and nail. How anyone can say this is sustainable is beyond me.

  10. John Q. Taxpayer says:

    You gotta ask yourself, why does wall street(AIMR: Association for Investment Management and Research the publishers of this piece of…information) have an interest in the sustainbility of social security? Time and time again wall street has shown the bottom line is of it’s only concern. I’d bank it’s still the same.

    The way they paint the picture, which is far from the truth with a little book-reading and research is that medicare and social security are inefficient beruacratically-run programs that can’t sustain themselves. Medicare has a tenth of the cost of our privatized system. And when Japan was looking for a program to model their universal health care system whose do you think they choose? OUR medicare system!

    If you want to talk about unsustainibility how come no one mentions the 550,000,000,000 billion dollar military budget? Here’s a crazy idea. How about we stop killing people and take some of that money and put it into the meager Department of Health and Human services. Which, I’m sad to mention is only 25,000,000,000. A far cry from 550. Less than 5% of the military budget. Now that’s something worth discussing

  11. The government will reduce our benefits in nefarious ways. One thing they could do is slip a small line item in the next defense budget that ties Social Security benefits to CPI minus 1%. Or, just alter how CPI is calculated so the increase is substantially smaller than true inflation.

    But, Medicare is the bigger issue. Social Security only has $11 Trillion in unfunded liabilities (only :) ). Medicare has $37 Trillion. @ John Q. Taxpayer – just because Japan looked at our system doesn’t mean it is any good. Japan looked at our auto industry and found ways to do it better. And to say Medicare is only 1/10 the cost is a questionable stat. Maybe it only covers 1/10 the population. I don’t know, but I do know there are far fewer on Medicare than private insurance. Also, the only reason Medicare functions as well as it does is because the outsource the entire claims/payment process to private insurers. Medicare has a few bureaucrats who monitor the private groups. If it was totally government run, it wouldn’t even come close to being cited as a model for other countries.

  12. JoetheBankgeek says:

    Let’s suppose there is some deflation over the next 20 years? That would help because there wouldn’t be any COLA’s. Or the Feds could say if deflation is 1% over the last calendar year than you get a 1% cut in benefits. Current federal law prohibits these type of cuts I guess? But no COLA helps some too.

  13. The Gooroo says:

    The numbers are really alarming, and things don’t seem to be getting any better. I really wonder what the government has planned if things keep going downhill like this.

  14. Hmm… this whole social security mess sure sounds like a government-run Ponzi scheme to me…

  15. We should never count on social security to pay us anything. Got to rely on our own savings and investment abilities.

    Great charts. At least we’ll all live longer!

  16. Robert is right on the money (pun intended).

    I work for a state that actually increased pension payments a year ago. Since the slump in the market, that may not have been the best idea; however, the plan remains well-funded actuarially. How can this be?

    I see two main differences:
    1. Lawmakers in my state cannot, by law, take money from the pension fund for anything but benefits; and
    2. The pension is allowed to invest in things other than treasury bonds. As I understand it, the only investment for what has not been “borrowed” by the federal government, is Treasury bonds. What’s the long-term return of Treasuries vs. the S&P 500? Big difference.

    So while demographic shifts, which we are facing in my state as well, play a part, if the system were adequately managed over the last several decades (by accumulating additional benefits when the demographics were in Social Security’s favor) we would not have to make the same tough choices we now have to make.

  17. estcstm3 says:

    This all comes down to having our taxes taken automatically from our paychecks.. Hear me out.

    Could you imagine if you got to keep your gross amount from your paychecks each month for people earning 40+ that is going to be thousands more each month, then at the end of the year ole uncle sam says hey can you now cut me a check for $20,000 dollars???? People would be PISSED! The reason they do the automatic withholding is so that you cannot miss what you never had! They are using a psychological tactic to dupe everybody. Hum social security and medicare are taken out each month. If you had to pay at the end of the year 10k 15k for SS that you may not even get to benefit from I think the government would start to change its ways.

    Sorry for the rant…

  18. I’m not sure about the analysis of those numbers. The only numbers that truly matter are life expectancy after turning age 65. For those numbers, check out the SSA page about life expectancy for social security.

    http://www.ssa.gov/history/lifeexpect.html

  19. There is another way out. Not a good one mind you, but one I worry we may take. That would be to allow a massive influx of young workers into the country.

    Many illegals currently work off the books (for example in construction) and pay no SS/MC taxes. But many others use false ID’s to get jobs with employers who DO deduct SS/MC payroll taxes for workers who, in theory, will not be eligible for benefits. This practice currently hides the magnitude of this problem and I have often wondered if it is one of the reasons our politicians have not gone after those employing illegals more aggressively. Bush told Mexico we wouldn’t leave all those SS paying illegals out in the cold, but he won’t be around to keep that promise.

    FWIW Japan’s pension system is in deeper trouble than ours with a great life expectancy and very small families.

    I suspect that in the next twenty years we may allow millions of third world 18-25 year-olds into our country to balance the books on this problem.

  20. There have already been numerous changes to the laws for SS in the past to help keep it solvent in the future.

    Taxes were increased substantially from the 1960′s to today.
    http://www.intel.com/support/m.....030231.htm

    Back in 1966 the SS rate was just 3.85% and since 1990 it has been 6.2%. That increase in the tax rates would counter act and more than balance the decrease in the ratio of workers vs retirees.

    They’ve also started taxing some social security benefits and added federal employees to the tax system.

    There will undoubtedly be more changes in the future, if/when they become necessary.

  21. I thought I read that fixing social security would be very simple if we just raised the cap, where the more wealthy will fund even over the amount of their benefits. It sounded very simple – yes, another tax on the rich may seem unfair to some, but to save the social security it seems like a good idea.

    To fix healthcare, I actually wouldn’t endorse a new tax on the wealthy. I think healthcare could be fixed my eliminating health insurance companies entirely and nationalizing our system. Insurance companies are obviously making billions just standing in the middle, so that’s where you can get your money to fund everyone’s healthcare. It’s amazing that people used to pay for actual healthcare out of their own pocket, but now they can’t even afford health insurance out of their own pocket.

  22. estcstm3 says:

    mimi – that is a very simplistic view. Yes lets tax the big bad “wealthy” so that I do not have to have any personal accountability to save for myself. The government should do everything for me provide my retirement ,make my cars, run my banks, pick my investments. tell me where to live, what doctors I can see. Sounds like our current tax system, the super wealthy already pay for like 80% of all TAXES! They do not get that back when they retire. As for people being able to afford healthcare along time ago they did not have frivolous LAWSUITS. You have the choice to save your own money and pay out of pocket. If you cant afford 100 month in insurance they you cant pay for a doctor period. Why would anybody want to work hard to accomplish things when you can sit back and get it for free.

  23. estcstm3:

    The super rich pay a smaller percentage of their income in taxes than the people who clean toilets. That’s why Warren Buffett has said he thinks it’s unfair that the workers who empty the trash cans in his office pay a higher percentage of their income in taxes than he does. Also, Medical malpractice accounts for ½ of 1 percent of health care spending.

  24. Okay – so it looks like our children and the rich (SS cap will surely go up – heck I could see it go from 102k with a gap to 150k then 9.6% on that!) could be paying higher taxes – more likely than not – additionally this seems to make a Roth IRA the way to go.

    I’m 100% in a rollover IRA (never qualified for contributions tax-free). Say I have 200k in it right now and in 2010 when eligible roll this into a Roth. I have the next two years to pay the Federal Tax owed on that (no state thanks to Texas :) no income tax). The day you’ve converted to Roth (say taxes are 25%) that’s leaves you with 150k. Can you withdraw that and spend immediately if you so choose without penalty/taxes – since no earnings yet and you are paying the 25% tax in the conversion? ty in advance.

  25. @Mimi

    Even if you did away with insurance companies, there isn’t nearly enough money there to fund health care. Health care costs Trillions not Billions. Your plan is very simple minded. Quit making suggestions like “tax the rich” and “do away with the middle man and take his profits”. Those companies employ lots of people and your plan would only increase unemployment.

    This government doesn’t care about addressing the cost of health care. Nothing in the current legislation addresses the cost. It’s just a massive take over. Too many people think that when the government takes over health care that somehow it will all be free. NOTHING is FREE. There is no free lunch. If our government wanted to fix the issue of rising healthcare costs there are many things they could do to address the cost but NONE OF THE SUGGESTIONS MADE ARE IN THE CURRENT LEGISLATION.

    @Jack

    Warren Buffet pays capital gains taxes yes, but the company he runs pays payroll taxes, income taxes and social security taxes. Buffet’s comment was disingenuous at best and should be ignored.

  26. You can save massively and wisely for retirement till you turn blue in the face, but when you do turn blue in the face, your ensuing hospital bill may exceed your private health insurance and then bankrupt you. There has to be something better than just every man for himself.

  27. What your article doesn’t mention and is equally important is that the creators of Social Security only guaranteed solvency of the program through 1980. They were very concerned that the government would see a huge pile of money and begin spend it or borrow against it to offset deficits. In other words in 1980 the program should have been overhauled but was not. All of this is spelled out very plainly on the SSA’s website under historical documents. They have the original testimony from 1935 on the site! Finally a quick look at the income statement for the US federal government shows what a met this really is. Bush’s Medicare D added 5 Trillion dollars in unmet obligations, federal retiree benefits and veteran’s benefits are another 4 trillion a piece. But Medicare is the gorilla in the room that no one talks about!

  28. I am saddened by the posts lack of reseach and shallow treatment of statistics. I can see the Trustee report was probably ignored. The boomers already paid and have ious to prove it, with 1983 as the change in plan. Default is a serious consideration?

    The worker/retiree ratio here is miscontstrued. A prediction for 2035 is of little value, and additionally probably ignores immigration. Even if the trust fund is not re-paid social security is in okay shape. Small incremental changes are all that is needed.

    This is one of the more shallow posts on the subject…scarey reading but no substance.

  29. This article doesn’t even touch the main issue…that there is NO Social Security trust fund. It’s a bunch of Treasury IOU’s, period. We’d have to sell treasuries or raise taxes to replace those iou’s. It’s not possible to owe oneself money, otherwise we would all be fabulously wealthy. If you want more information, you should take the Crash Course which talks about this and many other issues we are facing, medicare, medicaid, energy, etc. http://www.chrismartenson.com

  30. Citizen says:

    What I have always wanted to know is how much of our tax dollars are paid out to SSI. SSI, for those who don’t know, is welfare. SSI is for people who have never worked or paid into the system It was initially set-up for the blind and severely disabled and has morphed over the years to support people with things like anxiety, obsesity and a myriad of other things.
    I personally know many folks, being a social worker, like addicts who collect up to 1 thousand a month. I also know someone who has over 500 thousand in a bank and continues to collect SSI legally.
    I believe there are folks who truly need help but that we should reform the system so that only people who really need the help can get it.
    It is really hard for me to think that after paying into the system for 40 years it might not be available when I need it and then to see so much money going to people who really should be working and supporting themselves.
    It also makes me angry when people say that this is a welfare system for seniors when many of us have paid into it all of our working lives.

  31. People come in and out of SSI. I am sure there are some who should not receive benefits, but to say it is only obtained by those who have never paid in makes your statement false. Figures can be obtained at the SS.gov site.

    Why not be angy about Goldman Sachs and AIG bonuses? Time better spent.

    Social Security is an insurance program, and has ious given out just like a bank loans out your money…no lockbox exists anywhere except physical gold mostly. It is a pay go system that works well. The trust fund issue is silly, but important….one way to look at it was that of a loan to fund the tax cuts as spending increased.

  32. Of course SS is welfare, otherwise you would only get out what you put in plus interest. Retirees exceed that amount in a few years at most. What we need to get over is the idea that welfare is a dirty word. If you think it is a bad thing, return all your ill-gotten SS payments to help pay off the national debt, or give them to charity, and go back to living by the sweat of your brow, eighty-something and all.

  33. Donald,

    Social Security is paid for by workers for worker retirement as insurance. It is self-paid. It is not welfare by careful design. The cap has the danger of making the rich pay more than necessary to fund an imaginary intolerable gap made up be Peterson and Co., and sadly you are a believer. It is one way but certainly not necessary.

    Where you get the figures from payment in/payment out is just silly. Look it up first before you hit that submit button. I bet you are hung up on the word payroll tax…it is pay go and when you are old it you might be lucky if your kids do the same favor.

    SS does not draw on income taxes or other taxes, and will not have to in the pay go aspect. If you mean that the overpayments to this dedicated fund that you and I borrowed to pay for other services in other parts of the government to keep taxes down now is a problem, it is, but ious to China could be defaulted as easily instead of Social Secuity if you must default, which is unwise and not necessary. Are you suggesting you are a deadbeat borrower?

    Remember, banks do not have a lockbox, never have. They loan the money out with interest and expect to be re-paid. It is quite normal and shouldn’t worry you. But to say it is welfare is gross ignorance and easily disproved with about an hours reading the Trustees report….hmmm, about 80 pages.

  34. Warren,

    You better go check your pension fund. Both public and private defined benefit plans are in a lot of financial trouble and probably will be one of the next surprises in the news, although it is clear and has been. Pension funds, in addition, are some of the major losers in the current CDS and CDO toxic asset fiasco….many lost 25-30% value. Your 401k, if needed now, probably is in not so good shape for withdrawing. Please read more or continue to be fooled. Better call someone for information.

    Social Security needs no major adjustments now…you could make some in ten years and be fine, just a minor change up or down as needed. You are buying into the infinite horizon nonsense and are being scared by big scarey numbers which have no meaning even as projections.

    Social Security is still bringing in more than payout, and will for quite some time. Then you might want to not be a deadbeat and pay back borrowed money…afterall, it paid for other parts of the government you are using to your advantage.

  35. Social security is insurance, not a defined benefit plan (which are in serious underfunding as a whole), so if you are unlucky you will not starve.

    If you check the research most people’s 401ks are not managed well as a whole, so your individual succes in investing is fine but will not be good for millions of people not so gifted. If you invest well but are unlucky at retirement, losing income or paying medical bills from your investments, then you will be glad you have a backup plan in Social Security.

  36. Rdan,
    So you do think welfare is a dirty word.

    My only point was that a lot of people who complain about government largesse for undeserving dead-beats are themselves recipients of government checks over and above the money they paid in. Sure, insurance works the same way. Maybe if we all started to think of all taxes as insurance, people would calm down. My local property taxes are insurance against crime, fire, unsafe water, etc. In more advanced countries taxes also function as health insurance. Here, we like to think we are all independent actors, and it’s just not true.

  37. Donald,

    I may have misinterpreted or been too sensitive. Welfare
    Peterson language is bad. Welfare as in the constitution would seem to be a positive, wouldn’t it.

    I have no quarrel with the term in context…the SS fight is still ferocious and much under the radar, so I am more careful as it is used as a code word.

    If interested, I would recommend going the Angry Bear and then on the Bruce Webb’s series on Social Security, which is one of the very few that are detailed and quantified. Treatment at Money Blog is of necessity short and incomplete.

  38. I like that in due time the greed of the American populace will overwhelm itself.
    Politics to me used to be so fascinating. However now it’s only confusing and in many cases dishonorable (if what I am not confused about is true LOL) . I don’t know a politician who could affiliate themselves with SS and get a good job done and turn things around (not that I know any politicians, however I know much about their work).
    I think that my method of living isn’t perfect but if people who live in rags can use their resources to the best of their usage, and those who live in glass houses weren’t the epitome of blind. Things could change. The socialized money makers are putting it in their pockets, while the socialized needy have no entitlement or occupation. The greed is everywhere. Regardless of thought, its due to greed that so many are using the SSI system
    However I believe The USA to be such a “money power-house” that these issues will work themselves out In the long run. However I think there will be casualties, the president… I don’t trust him, and I haven’t kept tabs on his work. But let’s hope he knows what he’s doing… im not going to hate him, I think he’s looking out for us to the best of his ability with some possible selfish agendas. Hes looking out for the health of the country I think, and is not to extremely concerned about the “immediate happiness” of the common wealth????

  39. mary sparkman says:

    how many illegals get our socicial security that never worked for it??

  40. Well folks, without a look at the numbers and raw data easily available, many of the comments above are simply inaccurate. The premise of the post is simply wrong…worker to retiree ratio numbers are fine and will work based on current projections.

    The longevity figures are already figured into the projections. Read the trustee report itself, and do your own math.

    Ponzi scheme is a term that is loosely used here. SS is workers paying for their own retirement insurance. SS will be a solid benefit for young people to help insure a miminum amount of retirement security of their young selves to their older selves. Claims that say a private investment gets more are possible, but do not get ill or have a disaster in your life.

    Gee mary, many more illegals pay in but are not eligible. Lucky you.

  41. None of the above is true. Social Security doesn’t rely on younger workers fueling the payout for retirees. In fact the Social Security system has been remarkably well run to the point that if nothing were to change the system could continue to pay out through 2055 – well past the so called ‘Baby Boomer’ influx. The charts are pretty, but they don’t show the fact that the bulk of the money in the Social Security system is protected in trust funds set aside years ago, and growing.

    The people crying wolf over the Social Security being “broke” are of two sorts: 1) those with an agenda to get government out of the social security business and 2) those who believe them and are too lazy to do their own research.

  42. I feel that social security should be something we get to choose to contribute to. Looking at my current pay check as of today they have taken $2199.37 out of my earnings for 2010. When I am retirement age if they do not have the funds to secure benefits and monthly support then I think we as contributing workers should be able to request a refund and they should have to pay us every penny we paid in with interest. I could have done a lot better job investing this money so that if something happens to me my children can inherit the funds. I agree that health care at any age is important and can be financial suicide butt there has to be a better plan than what’s happening now.

  43. estcstm3 100 a month?….I pay 500 a month

  44. Don’t put the blame on the folks who have spent their lives putting in to the system. Put the blame on the government which has stolen the social security money and used it for other purposes over the decades. LBJ’s WAR ON POVERTY was and still is financed by this money. Mentioned elsewhere here, Berinie Maddoff ran the same scam. Putting the blame on the baby boomers . A talking point for every right wing tax cheat in Washington. If the average American knew about the fair and just retirement system the people of Europe receive, there would be a revolt in this country. They have taken our jobs, now they want our social security money. let’s not have these Maddoff’s put a guilt trip on us. Tax the rich banker politicians and let’s get back at least some of the money that has been stolen from the account.

  45. I have a suggestion. How about we stop or cut down on the Foreign aid we give out? It’s not that hard to say hey guys we’ve helped you out as much as we possibly could but now our people need this aid. Plain and simple we shouldn’t be supporting other countries if we can’t even support our elderly that have paid into the government for it.

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  2. Hustle All Day » Links for breakfast… says:

    [...] The current model for social security reads no different thanwhat Madoff put together, a ponzi scheme.  Which is reason #451 why I hustle. Link [...]

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