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Should You Count on Social Security?

© Lita Epstein

Everyone's asking the question, but if anyone gives you a definitive answer don't believe him or her. Social Security, and Medicare as well, are in serious trouble, but I'm sure they'll be there in some form when you retire. The big questions are how much will the benefit be and what are the risks that it will be cut even further the longer you have to go until retirement.

In 2001, more than 45 million Americans collected over $400 billion in benefits from the Social Security Administration. Nine out of 10 retirees today over the age of 65 collect benefits averaging $848. Yes, it's not much. Could you live on that? Probably not, but for two-thirds of today's retirees Social Security makes up at least 50 percent of their income and for about 10 percent it's their entire income.

Running Out of Funds

Yes, it's also true that the Trust Funds are running out of money in the 2030s. While it's not unexpected or unplanned, the date the funds will be exhausted is earlier than Alan Greenspan had hoped when he first proposed building the surpluses in the 1980s as the head of a commission to save Social Security. To save Social Security, Greenspan's commission recommended a reduction in future benefits and an increase in payroll taxes so the U.S. could get ready for the oncoming Baby Boomer storm.

Yep, you've guessed it; the Social Security crisis is being caused by the great influx of retirees expected when Baby Boomers reach retirement age beginning in the 2010s. Before we get into the numbers let's take a quick look at how Social Security started and how it is paid for by your payroll taxes.

Pay-As-You-Go System

Social Security is primarily a pay-as-you-go system. About 85 percent of the money paid in taxes is spent in the same year toward paying current beneficiaries. Approximately 15 percent goes into the Social Security Trust Funds for future beneficiaries. U.S. Government Treasury Bonds are purchased with those funds. For a short time, the U.S. government was using the Social Security surplus to pay down the debt, but thanks to the Bush Administration's 10-year tax cut, the economic costs of September 11, 2001, and a recession, the government is back to deficit spending. The Trust Funds are still there. While some folks are saying you can't depend on the funds, few financial planners consider government bonds a risky investment.

Social Security was never intended to be a person's only retirement fund. For the average wage earner, Social Security benefits were designed to cover about 40 percent of a person's current earnings. Financial planners estimate that you need about 70 to 80 percent of your earnings to fund a comfortable retirement.

The copyright of the article Should You Count on Social Security? in Investing/Personal Finance is owned by Kirk Lindstrom. Permission to republish Should You Count on Social Security? in print or online must be granted by the author in writing.