Social Security Tipping Point in 2010 – IN THE RED

by Darwin on August 9, 2010

Social Security will actually pay out more benefits this year than it will take in which is a pretty shocking wakeup call.  While I’d been hearing about skepticism over the solvency of Social Security ever since I was a little kid, 2010 marks a year when the payouts don’t match the intake and given our aging demographic and low birth rate, there’s no plausible expectation of the situation reversing itself without a major overhaul (reduction) in benefits or increase payroll contribution (tax increase, which Obama promised wouldn’t happen to those making less than $250,000 per family).

The Future of Social Security

While this phenomena did actually occur in the 1970s for a few years, the remedy at that time was to increase the Social Security holding rate from 2% to a whopping 6.15%.  So, the question is whether we’ll see further increases to the contribution rate or whether we’ll have to increase the Social Security retirement age which has been gaining traction in political circles.  What’s been especially challenging for the fund this year is the massive layoffs we’ve seen in the recent economic downturn.  Since the Social Security coffers are funded via payroll taxes and since the real unemployment rate is well over 10% (reported rate excludes may who are not actually employed due to nuances of terms and definitions), the fund is hit especially hard.

When I talk to people my age, they generally dismiss Social Security as something that they’ll never see so people shouldn’t even count on it.  On one hand, I tend to agree that nobody should “count on” Social Security payments to fund their retirement.  It was really meant to be a safety net for people that encountered extreme situations entering retirement like loss of wages, a personal tragedy, death of a spouse or some other circumstance that will help to keep people fed, warm and housed in their golden years.  It wasn’t meant to be a 401(k) Match.  However, it would be rather frustrating to have paid into a system for decades, in many cases, at a rate higher than you’re funding your own retirement account (6.15% is nothing to sneeze at and 43% of Americans have LESS Than $10,000 in their retirement accounts) only to get back nothing in retirement.  So, I can understand the cynicism of the current generation of young workers.  The generation entering retirement doesn’t have much to worry about in terms of cuts to future benefits.  Any talk of benefit reductions or retirement age increases wouldn’t occur for several years.  First of all, no politician would alienate such a huge voting block, right or wrong.  But also, the thinking is that projecting changes several years into the future would allow people ample time to prepare.

Other Crises on the Horizon

Unfortunately, Social Security solvency is just one of many challenges facing the country that our children are ultimately going to have to deal with.  While the EU is embarking on a path to Austerity, the US is passing new costly and burdensome legislation, a massive new entitlement in Health Care Reform and then there’s the pension crisis brewing.  We may also have a bailout of many states underway as well.  After all, is the administration really going to let California and Illinois default?

So, we have our work cut out for us, and with everything else going on in the world and so many jobless, it’s tough to put this topic at the front of the line.  It’s easier to just continue to kick that can down the road.

Are you worried about these brewing crises?

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1 Mark Wolfinger August 9, 2010 at 8:58 am

The pension crisis has already been brewed and s currently being served to all citizens. But cowardly politicians do nothing.

2 Crystal in Ft Worth August 10, 2010 at 1:24 pm

I’m terrified…and pissed. I’ve had a full time job since the age of 18 and have paid THOUSANDS-none of which I will ever see. Oh! I must get back to work-the welfare lot are planning a party and need my tax dollars to pay for it

3 jim August 11, 2010 at 2:50 pm

“While this phenomena did actually occur in the 1970s for a few years, the remedy at that time was to increase the Social Security holding rate from 2% to a whopping 6.15%”

It took 40 years from the tax rate to go from 2% to 6%. During the 1970’s the tax rate went from 4.2% to 5.08%.

4 Joao August 16, 2010 at 10:45 pm

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