The REAL Truth About Social Security

I decided to reprint this article from a few years ago. In the very near future, there will be quite a bit of discussion about what has become known as "entitlements". These entitlements affect just about everyone, from those receiving, relatives of those receiving, as well as those contributing.


By now we have all heard the horror stories about Social Security and how long it will last. As a baby boomer who is married to a baby boomer and now retired, I feel this issue has to be addressed as factually as possible. To listen when the status of Social Security is discussed, you would swear people of both sides of the political spectrum were talking about two seperate funds. Therefore, I think we might need some facts to blow away some of this smoke.

First a bit of history. Social Security came into being on August 14, 1935 under the mantle of the Social Security Act. What many of us don't know, this act not only promulgated Social Security, but also allocated money to the states to provide assistance to aged individuals (Title I), for unemployment insurance (Title III), Aid to Families with Dependent Children (Title IV), Maternal and Child Welfare (Title V), public health services (Title VI), and the blind (Title X). It was a huge piece of legislation. Consequently, the act has been embroiled in controversy and constitutional arguments since it's inception. Although it has been modified many times since the 1930's, two of the bigger changes are as follows:

• In 1965, Medicare was added under the Social Security Act of 1965, part of the Great Society program.
• In October 1972, Congress amended the Social Security Act to incorporate Supplemental Security Income (SSI).

Some have called our Social Security Fund the lynch pin in the compact with our senior and disabled citizens. Some others call it the greatest Ponzi Scheme ever created. The majority of us believe it to be somewhere in the middle of these two views.


With all of this Congressional oversight and tinkering, why do some believe Social Security is going broke? The answer can first be used by giving an example. The first monthly payment was issued on January 31, 1940 to a woman in Vermont. From 1937 to 1939 she paid a total of $24.75 into the Social Security System. Her first check was for $22.54. After her second check, she already received more than she contributed over the three-year period. She lived to be 100 and collected almost $23,000.


The Social Security Fund has one source of revenue and one only - the payroll tax system or better known as FICA. This tax of 15.3% of wages earned is imposed equally on employers and employees, consisting of a tax of 6.2% of wages up to an annual wage maximum ($110,100 in 2012) for Social Security and a tax of 1.45% of all wages for Medicare. If you are self employed, you are responsible for paying the entire 15.3% all by yourself. Besides this tax, there is nothing coming into the fund. More people work, the more in contributed to the fund - the less people work, the less comes into the fund.


Many believe the fund is in trouble and needs a major overhaul as soon as yesterday. Consider the following:

• For the years 2011 and 2012, the employee's contribution has been temporarily reduced to 4.2%, while the employer's portion remained at 6.2%. It is possible due to political pressure this 2% cut could be continued into 2013.
• This past June, 80,000 new jobs were created while 85,000 people were authorized to go on Social Security Disability Insurance Program.
• The current U6 unemployment rate is 15% as of July. This is the rate most economists like to use rather than the U3 rate which only tells part of the story. The U3 rate is currently 8.3% which in and of itself is bad enough. However, the U6 rate covers everyone who is not working, including those who have given up and left the workforce. That is 15% of us who are not contributing into the Social Security Fund.

A former congressman use to say that once there are more people riding in the wagon than are pulling the wagon, the wagon won't go anymore. I think our Social Security wagon is getting very heavy, and the trend is for it to get heavier.


To use a term that is being bantered around with abandon these days, the Social Security system is unsustainable. It is unsustainable because the premise on which it was based is no longer valid. First, the system assumed that more people would be paying into the system than receiving benefits. That might have been the case at one point in our history, but it surely is not the case now. Next, we have a growing number of  people who are receiving benefits that have not contributed a dime into the system. Finally, we are living much longer these days than our grandparents did. In short, it would have been a miracle for Social Security to work as well in 2012 as it did in 1950.

To add insult to injury, most know the system needs major repair and needs it now. However, this issue in not called "the third rail of politics" for nothing. People who have involuntarily contributed into this fund their entire working lives will not take lightly any diminution of benefits which were promised years ago by the Federal Government - just look at Greece this year.

Solution? If I knew, I would be in Washington D.C. making a fortune as a consultant. However, consider the following:

• Immediately offer an opt out clause for people under a certain age. It would their decision to continue with this system (and the risks contained therein) or participate in a yet to be defined, self directed retirement program.
• No more "free riders". If you have not paid in, you may not receive benefits.
• Take the $110,000 cap off contributions. Every cent made will be subject to the tax.
• Under no circumstances extend the 2% reduction in the payroll tax. This is like trying to water a thirsty garden with a hose that has a hole in it.
• This one is going to be tough. Because the long period of neglect, there will probably need to be some sort of means testing for those who receive benefits.

As the old saying goes, "bad news does not get better with age". Because we did not have the national will to fix this earlier, when the fix would have been much less painful, we need to fix this and fix it now. Many fixes will be tougher than others, however, doing nothing borders on the criminal. Fix this, and fix it now!