No wonder, then, that a Gallup poll
last year found 60% of Americans don't expect Social Security to pay them benefits when they stop working. The worries are especially acute among younger people: 77% of 18- to 34-year-olds told the pollsters that Social Security is either in a state of crisis or has "major problems."
Social Security isn't a direct cause of the federal deficit. But policymakers do need to address a problem down the road in 2035, when the program's huge surplus will be exhausted from paying out retirement funds to the boomer generation; at that point, it would have enough funds from current revenue to pay about 78 cents on every dollar of promised benefits.
Neither political party has yet put forward a specific Social Security reform plan to fix that problem, although President Obama might yet embrace the recommendations of his own National Commission on Fiscal Responsibility and Reform
, which call for long-range benefit cuts via higher retirement ages, lower cost-of-living adjustments, and a more progressive benefit formula.
Social Security isn't going away anytime soon, and it's highly unlikely that reforms will impact today's seniors or boomers nearing retirement. But Americans in their early 40s and younger are right to worry about Social Security's future. What's more, the program already is becoming less valuable for all Americans as a result of major changes enacted by Congress back in the 1980s.
How confident should you be about Social Security? What role should benefits play in your retirement plan? The answers depend on your age.
Social Security 101
First, let's separate myth from reality on Social Security's financial condition, relationship to the national debt, and its role in the economy.
Social Security had a $2.5 trillion surplus in 2009, a number that will hit $3.8 trillion in 2020 before it starts falling again as boomer retirements accelerate, according to the Economic Policy Institute
, a progressive think tank focused on the economic condition of low- and middle-income Americans and their families.
Social Security isn't a cause of the deficit, and the surplus is not an illusion. Social Security critics often deride the surplus as no more than worthless I.O.U.s from the U.S. Treasury owed to the Social Security Trust Fund (SSTF). That's false. The surplus is invested in a special type of full-faith-and-credit Treasury bond that the federal government must repay to the SSTF. The government has, indeed, spent what it borrowed from the SSTF--what other reason would it have for borrowing the money?
So, what is a huge surplus for the SSTF is a big long-term liability of the U.S. Treasury--but no different than the debts we owe to bondholders in China or anywhere else in the world.
Social Security's current cash flow negative status isn't a surprise, or a worry. Last year, Social Security began paying out more than it is taking in. That was always expected to occur as the giant boomer age wave started drawing benefits from the surplus, but it happened a couple of years earlier than expected due to the severity of the recession.
Social Security is not overwhelming the U.S. economy. Benefits are equal to 4.9% of gross domestic product (GDP), and will rise to just 6.2% in 2035, when all baby boomers will be 65 or older. After 2035, Social Security expenditures are projected to stay around that percent of GDP through 2085.
Why Social Security Matters
It's difficult to overstate the role of Social Security as a key source of retirement security. The program's monthly benefits will be the most important--and only--source of guaranteed income for most retirees: 40% on average.
For many seniors, Social Security will be the only source of inflation-protected guaranteed income--by law, benefits are adjusted annually according to a cost-of-living formula tied to one of the government's key measures of consumer prices (CPI-W). That makes it an invaluable tool in combating longevity risk--the risk that you'll outlive your money.
Social Security also provides critical protection to elderly women, who outlive men and tend to bring fewer assets into retirement due to lower lifetime earning histories. The program is the sole source of income for 42% of single women over age 62, according to the AARP Public Policy Institute.