The Brief Brief History
History was boring in school and we're almost positive it hasn't perfected with age so we're not going to spend much time in this section. To answer the question of how Social Security got here in the first place, it was created by Democratic President FDR back in the 1930's because people had ZERO MONEY saved up for retirement. We'll get into WHAT Social Security is in just a minute, but just know that during the 30's and 40's when it was first invented it lost money (meaning it paid out more money in benefits than it took in from taxes), it made money during the 50's and 60's, and it went back down to losing money BIG TIME in the 70's. It lost so much in the 70's that people back then actually thought it was going to go bankrupt, so in the 80's they called in a panel of experts headed by the legendary Alan Greenspan to fix the problem, which they did. Greenspan took out his magic tool kit, did some mathematical tinkering, and Social Security has operated at a surplus ever since.
So...What is Social Security?
Contrary to political talking points, Social Security is not an investment retirement fund - it's actually an Insurance plan. Investment retirement funds are things like your 401k, Roth IRA's, etc. that you put money into over time and then cash out later on down the road when you retire. Social Security, by contrast, is a Social Insurance program run by the Federal Government. It's just like car insurance, home insurance, etc. but instead of paying out benefits to people who have car accidents or damaged homes it pays out benefits to people who unfortunately find themselves retired in their 60's with little or no savings. You might ask "well who the heck is retiring without any savings???" but you might be surprised to know that Social Security makes up more than HALF of the income for nearly 66% of retired Americans and for 17% of Americans it is their ONLY source of income at retirement. Scary huh? Start saving your pennies today!
How Does Social Security Work?
Social Security is a "pay-as-you-go" type program. Meaning, every year, all the benefits that are paid out to retired Americans are taken directly from the taxes taken in from working Americans. Many people have the misconception that when you retire you get all of the Social Security money back that YOU personally paid into Social Security over the years. Not so. Remember, it's not an account - it's an Insurance plan. Everybody pays into it to spread the risk around, and then payments are made out when its needed, just like car insurance only in this case we're paying retired folks. And getting back to the pay-as-you-go part, when you retire, your Social Security check is directly funded by the tax dollars of everybody who happened to work that same year. To put it differently, the tax dollars that you and I are paying out of our checks this year are being used to pay somebody's retirement benefits this year.
What Happens to the Extra Money Social Security Brings In?
This is sort of where the big debate starts. Like we said, each year Social Security uses the money from the American tax payers to pay for American retirees, and since Greenspan gave it the magic touch back in the 80's, Social Security has continually brought in more money in taxes than it has paid out in benefits. So what happens to that extra money? Well the wise guys in Congress decided way back in the 40's to create the Social Security Trust Account to house all the extra money. Pretty smart idea right? But then Congress got creative with it and decided to borrow the extra Social Security money and issue "government bonds" (in other words, IOU's made out to Social Security with a promise to pay the money back someday). Why did they do this? So that they could spend the money of course. To put this in real dollars and cents, last year Social Security took in $689.2 billion from the taxes of American workers, and it paid out $685.8 billion in benefits to retired Americans, resulting in a cash surplus of $3.4 billion that goes into the Trust Fund. But Congress couldn't just straight up jack the $3.4 billion from Social Security's Trust Fund, so they "borrow it" and write IOU's (Bonds) for every dollar they take. It is this Trust Fund that is the source of big debate.
The Alleged Problem
We say "alleged" problem b/c some experts flat out say the problem we're about to outline here can be solved with a few minor budget adjustments. Now, the "problem" gets a little messy so, as promised, we're gonna keep this as simple as possible. The experts predict that when the majority of the Baby Boomers retire (somewhere around 2016), Social Security will have so many people to pay that the benefits paid out will continue to be greater than the tax money coming in the door from the American workers each year after 2016. This will tip the scales from making money (where it is now) to owing money. When that happens, Social Security will have to start dipping into the infamous Social Security Trust Fund in order to pay Social Security benefits to everybody who needs them. As you will recall, the Trust Fund is a large pile of IOU's right now, so when Social Security dips into the Trust Fund that forces the federal government to start repaying those IOU's. When the feds repay the IOU's, the IOU money doesn't go back into the Trust Fund, it goes straight to where it is needed - which is to Social Security to help pay for retirement benefits. So in other words, the IOU money that was supposed to go back into the Trust Fund never gets to go back into the Trust Fund because it will be needed to pay Suzie Q's Social Security check. Repeat this process a couple million times a year and the experts predict that the Trust Fund will be completely exhausted somewhere around 2042 to 2052 give or take (according to Social Security and the CBO, respectively). This inspired President Bush in 2004 to come up with the idea of Privatizing Social Security.
To Privatize or Not to Privatize, That is the Question
Which brings us to privatizing Social Security. What does Privatizing Social Security mean? Well, basically it means that you take everything that we just talked about above, remove it from the control of the Federal Government and put it under the control of Wall Street. (stop laughing)
The Pro's of doing this:
- You have more control over when you want to retire
- You have more control over which investments you place your retirement money into
- You have the Potential to significantly increase your retirement savings over what it would have been under the current Social Security program (assuming the stock market does well)
The Con's of doing this:
- The transitional cost of moving everybody's retirement from public to private would add to the deficit
- If done today, it would deplete the Trust Fund by approx. 2025 (20 years sooner than currently predicted)
- You are trusting your retirement savings to Wall Street
- In the event that the stock market crashes, the federal government will likely be called on to bail out the retirees who will have lost their retirement savings
The Question we pose to you is, given everything we've said here, should we Privatize Social Security or not?