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Brochure
Q. Can I rely on Social Security to be there when I retire?
A. If we act soon to make necessary changes, Social Security will be around for you and your grandchildren. However, Social Security was never meant to be your only retirement income. To live comfortably, you'll also need personal savings and other income.
Q. Is Social Security really on the verge of collapse?
A. The truth is, today's Social Security system can pay full retirement benefits well into the next century — but unless changes are made soon, the system's long-term future is in jeopardy.
On the edge of change
Putting Social Security back in balance
For almost 60 years, the Social Security system has kept its promise to American workers: making payments on time to everyone entitled to benefits. But today, reports of a Social Security "crisis" lead many workers to believe the system will "go broke" by the time they or their children retire.
The truth is, today's Social Security system can go on paying full retirement benefits well into the next century. It's also true that, for various reasons, Social Security will face serious financial challenges in about 30 years. The sooner we make necessary changes to the system, the less drastic they can be, and the more time people will have to adjust.
Finding Solutions
This brochure from The Actuarial Foundation presents ideas being discussed to improve Social Security's financial future. No one can predict the future with certainty. However, actuaries use statistics and financial analysis to forecast what's likely to happen and how much these events may cost individuals, business, and the government.
Historically, actuaries have advised the government on the financial soundness of Social Security. Now, they are again among the experts helping to find solutions and to explain how these solutions would work. However, as in the past, Congress and the President will make the final decisions about changes to the system.
How Social Security Works
Monthly cash benefits are paid under the Social Security program in the form of retirement, disability, and survivor benefits. Social Security benefits are based on your lifetime earnings and rise with increases in the cost of living. Full Social Security retirement benefits are available at age 65 if you were born before 1938. Beginning with persons born in 1938, the age at which full retirement benefits are payable increases gradually until it becomes age 67 for persons born in 1960 or later. You can start receiving Social Security benefits as early as age 62; but if you do, you'll receive smaller monthly payments because your benefits will be paid over a longer period of time.
Social Security is financed mainly by a 12.4% tax on earnings. Payment of this tax is split evenly between you and your employer. If you are self-employed, you pay both the employer and employee share of this tax. Most of these taxes are used right away to pay benefits to workers who are already retired or disabled, to their family members, and to survivors of deceased workers. Money left over goes into two Trust Funds, one for retirement and survivor benefits and one for disability benefits.
Today, the Trust Funds have a reserve of more than $500 billion, because more money has been deducted from payrolls than has been needed to pay benefits. This reserve is invested in U.S. government bonds, and the interest earned from these bonds adds to the Funds.
When Billions Aren't Enough
So, with more than $500 billion on hand, why are we worried about Social Security? This is exactly the question actuaries, because of their forecasting skills, are best qualified to answer.
The main reason for this concern is the aging of our population. People are living longer and having fewer children, resulting in more retirees and fewer workers. Today, there are three workers paying Social Security taxes for each person receiving benefits. By 2030, there will be only two workers for each recipient. Government actuaries estimate that by 2012, the money collected each year won't cover the benefits that need to be paid. More and more payments will then have to come from the interest income and then later from the assets of the Trust Funds. In 2029, the combined Trust Funds will be used up. After that time, the taxes collected will cover only about 75% of the benefits paid.
Fixing the System Before It Breaks Down
It's clear that we need to change the Social Security program. We must bring more money into the system or slow the rate of growth in benefit payments — or both.
Advisors to the Social Security Administration, some members of Congress, and other organizations have developed proposals to accomplish this, using a variety of approaches. Although none of these proposals is likely to be adopted in its entirety by Congress, each represents current thinking about possible ways to fix the system.
Let's consider the four basic ingredients in developing these approaches.
1. Increase tax revenue for the system. To generate additional tax revenues, the system would have to raise the payroll tax rate; increase the maximum earnings level subject to tax (in 1996, workers pay Social Security taxes only on earnings up to $62,700); make more benefits subject to federal income tax; include workers not now in the system — such as some government employees covered by government pensions — or support Social Security by taxes from other sources.
2. Slow the growth of benefits. To decrease benefits paid out by Social Security, the system would have to increase retirement ages, reduce cost-of-living adjustments, decrease the rate at which benefits accumulate, or reduce payments to some types of beneficiaries.
3. Invest assets in stocks. All Trust Fund assets are now invested in U.S. government bonds. Investing some of the funds in stocks may yield higher returns in the long run, and could add income to the system and prolong the system's ability to pay benefits.
4. Require individual savings accounts. These accounts would give individuals more control over their Social Security "investment" and provide some of the benefits that now come from Social Security. Workers could choose from alternatives such as money market funds, bonds, and stocks. But this may make it harder for individuals to know how much money they'll have by retirement. Also, Social Security may need additional funds to pay current benefits while switching to individual savings accounts.
Planning for Retirement Is Up to You
If appropriate changes are made, Social Security will be there in some form when you retire. However, it was not originally designed to be your only retirement income. To live comfortably, you'll also need personal savings and other income. Unfortunately, many people do not save enough for retirement, and only about half of today's workers participate in employer-sponsored retirement plans. Because Social Security plays an important role in meeting the nation's retirement needs, changes to the system will affect everyone's plans for retirement. No matter what these changes are, it is wise to plan your personal savings now to prepare for a comfortable retirement.
How to Get Started Today
Information from additional resources
is available to help you plan for retirement or call our toll-free number:
1-800-932-3094.
You Can Help
We would like your input to help us plan future consumer education materials on issues where actuaries' expertise is useful. Please complete the survey on this Web site.
Contact us with other questions or comments at:
The Actuarial Foundation
475 North Martingale Road, Suite 600
Schaumburg, IL 60173-2226
847.706.3535
847.706.3599 Fax
A consumer education brochure from The Actuarial Foundation.
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