The Unsustainability of Social Security… in One Graph

You’re looking at a graph of the ratio of covered workers paying into the Social Security program (technically OASDI) versus beneficiaries receiving payments.  Through 1965, there were always at least 4 workers paying in for every beneficiary.  In 1983, the program was overhauled with an eye towards sustainability, which pegged the ratio between 3.2 and 3.7 all the way through 2008.

The Times They Are a Changing… (or Why is Social Security Going Broke?)

In the midst of the Great Recession amongst a generational high unemployment rate and on the front edge of a wave in Baby Boomer retirements, the ratio has fallen to new lows.  In 2010, every beneficiary only had 2.9 people current workers paying into the system.

The huge wave of Boomer redemption will likely only push the ratio down further – especially if it is hard for an ample number of Generation Y members to replace them.  Even so, it will be hard to balance the Social Security on the back of those Ys because they are just entering the workforce (read: it is the lowest earning potion of their career).

All of this adds up to future changes in Social Security.  I know some members of Generation Y are lamenting the destruction of Social Security before it happens.  The good news?  It will probably be there when they retire.  The bad news?  There is little chance you’ll get your (currently) promised benefits at the promised age.  The system can’t afford the structure as it stands – the Baby Boomers are too large (and, by the way, they have higher life expectancies than past generations).

The Key Takeaway

The post is not meant to be apocalyptic – many smart people have seen the water circling the drain for a while.  I have no doubt that Social Security will be around for a while.  First, you need to understand that there is no private account sitting somewhere with your name on it.  Only due to some budgetary tricks is Social Security not in the General Budget of the United States (The so-called Social Security Trust funds buys government debt, and those proceeds are in the general fund – tricky!), but rather off balance sheet.  Although private accounts has been kicked around as an option, that isn’t a likely change anytime soon.  Secondly, you need to understand that the safest course is to save as much as you can in other accounts.  401(k)s, IRAs, Trust Funds, Municipal Bonds, Brokerage Accounts, savings accounts, money under a mattress – search around on this site or others to get the run down.

Tke key takeaway is you need to be responsible for yourself… the promises that were made to you are unsustainable.  What do you say… open a Roth IRA today?