Problems With Social Security Benefits
by Jim Schlagheck.

Social Security is another important pillar of American retirement. It was established, we noted, in 1935 following the Great Depression. The first monthly retirement check--$22.54--was paid to Miss Ida May Fuller of Ludlow, Vermont. Miss Fuller lived to be one hundred years old and collected $22,888.92 in total Social Security benefits.

Today, an estimated 162 million American workers are covered by Social Security, and nearly 54 million Americans are now receiving Social Security payments. Social Security, it turns out, is the most important source of retirement income for a great number of Americans. The average Social Security payment for retirees in 2007 was approximately $1,048 a month. Today, one out of five retired couples and four out of ten unmarried individuals derive 90 percent or more of their income from Social Security.

One common misconception--a core part of prevailing retirement myth--is that Social Security is meant to take care of us in old age. That, again, is not the case. As one expert put it, "Social Security wasn't even intended for that in the beginning. It was only to be an income supplement to your personal savings and other pensions. Under the most optimistic scenario, Social Security alone wouldn't allow you anything but genteel poverty when you could no longer earn a living.

Another mistaken belief is that our "pay your won way" Social Security contributions are an investment in our own retirements. They are not. A team of economists who studied the system concluded that the contributions we make into Social Security are basically "transfer payments from...workers to nonworkers." You are not paying for yourself. You are paying for the retiring beneficiaries drawing down before you.

That brings us to Social Security's design flaws: (1) Social Security was built with the expectation that beneficiaries would have a relatively short life span in retirement; and (2) it does not, after all, directly link the benefits that are paid out with contributions that actually come in. Social Security has an inflow-outflow mismatch--and that is a serious defect. It means that as the surge of baby boomers nears the age to obtain benefits, Social Security will not have adequate long-term funding to pay them.

Social Security, we said currently pays benefits to approximately 54 million American retirees, the disabled, and their dependents. That number will jump to 91.5 million in 2040.

There is, consequently, an inflow-outflow mismatch of megaproportions taking shape. We can size up the problem as well by looking at the ratio of "funders" to "beneficiaries." In 1945 there were 41.9 workers paying into Social Security for each one beneficiary taking payments out. There are currently 3.3 workers paying into the system for each Social Security beneficiary. Within forty years, there will be only 2 workers paying in per beneficiary. The ratio of funders to beneficiaries is shrinking dramatically.

You are sure to hear a great deal of debate about whether Social Security is, after all, becoming insolvent and even more ruckus about how to fix it. It suffices to not here what the Trustees of the Social Security Administration themselves, have to say:

• Social Security's financing problems are long term and will not affect today retirees and near-retirees, but they are large and serious. People are living longer, the first baby boomers are nearing retirement, and the birth rate is low. The result is that the worker-to-beneficiary ratio has fallen...to 3.3-to-1 today. Within forty years it will be 2-to-1. At this ratio, there will not be enough workers to pay scheduled benefits at current tax rates.

Longer life spans, the surge of an unprecedented number of baby boomers into retirement, and the dwindling number of funders relative to beneficiaries are all putting increasing strain on Social Security's coffers. The pressing question today is whether Social Security can continue paying out the stipends. And the simple answer is that, as it is structured and funded today, Social Security cannot. Social Security will not have adequate funding to continue making the same payments beyond 2041 according to Social Security's own trustees, or beyond 2053 according to the Congressional Budget Office.

Social Security will not be able to pay the same benefits in the future as now if it is not radically overhauled. And that's not my educated guess. It's the factual pronouncement of the people who run it.

• Question: I'm 26 years old. If nothing is done to change Social Security, what can I expect to receive in retirement benefits from the program?
• Answer: Unless changes are made, when you reach age 60 in 2040, benefits for all retirees could be cut by 26 percent and could continue to be reduced every year thereafter. If you lived to be 100 years old in 2080 (which will be more common then), your scheduled benefits could be reduced by 30 percent from today's scheduled levels.

Take heed. Retirement security in the United States was once based on a much touted "three-legged stool": Social Security, pensions, and your personal savings. Today, pensions are becoming extinct, personal savings are pathetically low, and Social Security needs urgent fixing. Let me repeat: Social Security's problems are not likely to affect today's retirees or people close to retirement. In due course, however, the government will have to lower Social Security benefits, extend the retirement age, encourage people to work longer, impose heavier taxes, or do all of the above--there is no alternative. For all Americans, the Social Security picture is grim. It means that you have to take charge of funding more of your own future.

About this article and the author:

Jim Schlagheck is a wealth management specialist, the author of "Cash-Rich Retirement", and the co-producer of "Retirement Revolution", a public television series on better ways to prepare for retirement.  He has worked with leading financial institutions and counseled super-wealthy families around the world.  His book guides readers through a 6-step action plan to build savings and reduce investment losses.  His views are not a solicitation to buy any product or service.  You alone are responsible for determining whether any investment, product, or strategy is suitable for you based on your own, independent research, your investment objectives, your financial and personal situation, and the advice of your financial and tax advisors. He has his own investment blog, "Show Me The Money" at www.invest-blog.com.

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