PREMIER Business & Finance: SSSSocial Security, A Hot Topic

May 2012 Social Security is one of the third rails of politics, if you touch it you get electrocuted.

Social Security is one of the third rails of politics, if you touch it you get electrocuted. That’s why politicians are afraid to deal with this issue. For those who are saving for retirement, especially younger people, you might want to be concerned about its future.


The “Social Security Act” passed in 1935. Originally it was “a system of Federal old-age benefits” for workers and their families. In 1956 the law was amended to also provide disability benefits. According to a 2010 report by the Social Security Administration, as of June 30, 2009, nearly 17% of the U.S. population was receiving monthly Social Security benefits. That figure continues to rise.


In 1936, when social security was in its infancy, the government published a pamphlet concerning Social Security taxes: “…beginning in 1949, you and your employer will each pay 3 cents on each dollar you earn, up to $3,000 a year. That is the most you will ever pay.” When accounting for inflation, the U.S. taxpayer’s maximum liability in 2010 was 8 times that 1949 figure according to a web page, “CPI Inflation Calculator” from the U.S. Department of Labor, Bureau of Labor Statistics.


Some other interesting facts deal with life expectancy.  According to “Life Tables for the U.S. Social Security Area 1900-2100, Actuarial Study No. 120,” if you were born in 1935, you could expect to live to about 65 for males and about 72 for females. If you made it to age 65, and were born in 1935 you could expect to live about another 16 years for males and about 19 years for females. For those born 1946 to 1964 (boomers), the study projects average life expectancy at about 72 to 76 years old for males and about 78 to 82 for females. However, if boomers live to age 65, their life expectancy actually increases. For males, it increases to about age 82 to 84, for females it increases to about 85 to 87 years old.


The problem is the majority of boomers and beyond will live well past the age of 65, causing a severe strain on social security because current social security tax payers are paying for those who have retired already. As the number of social security recipients has grown, the government has raised the percent that both employees and employers must pay into the system. According to the Social Security Administration web page “Social Security and Medicare Tax Rates,” when the Social Security program began, the tax rate was 2% for employee and employer combined and zero for the self-employed. As of 2010, the social security tax for employees and employers was 12.4% combined and also 12.4% for the self-employed. So, we are paying higher rates to pay for more people’s benefits.


Unfortunately, many believe at some point in the next few years, social security will be taking in less than it’s paying out. Some say that’s already happening. In any case, the surpluses that the trust fund has accumulated will start to wind down as the boomers stop paying into the system and start receiving retirement benefits from the system. Some say the social security trust fund will go to zero by 2037, others say it will be quicker.


The government has choices. It can raise taxes, lower benefits, raise the age at which people get benefits, or bail out the program using general tax revenues. Tough choices for politicians.


Many young people tell us they don’t believe social security will be around when they retire. We don’t know if that’s true, so our solution is to start putting money away in a retirement plan for yourself. The younger you are, the more money you will probably need to put aside.  Whether it’s a 401-K, a self-directed IRA or some other plan it’s important you do not delay because the compounding of money will be your greatest ally.


By Steven R. Wolff, Managing Partner at Wolff, Wiese, Magana

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Wolff Wiese Magana is an Investment Adviser registered with the SEC.  Advisory services are only offered to clients or prospective clients where Wolff Wiese Magana and its representatives are properly licensed or exempt from licensure.  This editorial is solely for informational purposes.  No advice may be rendered unless a client service agreement is in place.














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