What is social security and where did it originate? The Social Security Act was signed by FDR on August 14, 1935, taxes were collected for the first time in January 1937, and regular benefits started in January of 1940. Originally, under the 1935 law, Social Security was meant to work as a Retirement Program for the primary worker. Survivors benefits, benefits for spouses and children, were added in 1939; and in 1956 disability benefits were added.
Social Security or Public Pensions have helped a lot of people stay out of poverty over the decades. For example, the United States, Canada, UK, Australia, Netherlands, Sweden, Switzerland, and Chile have some of the best public pensions in the world. In those countries, the average poverty level is 12% of the population. When finding the average for the other 163 countries whose pensions aren’t as good, their reported poverty level average jumps to 27% of the population that are living at or below poverty levels. In 2017 the Federal Poverty Level in America for a family of two is $16,240. So, while working in your prime might seem like an easy mark to stay above, in reality after being in retirement for 10-20 years, $16,240 might be harder to earn than expected. So there really is something about public pensions that help people stay above poverty, because the average monthly benefit for retired workers in 2016 was $1,360 per month – which is $16,320 annually. An article from the International Monetary Fund (IMF) states that poverty rates among people who are 65 and over would be much higher even in advanced economies if they did not have public pensions, such as social security.
So, what is the current status of Social Security and can we depend on it going forward? According to the Social Security website, benefits are expected to be payable in full until 2037, when the trust fund reserves are projected to become exhausted. At that point, benefits will need to be paid by continuing tax revenues, which should cover about 76% of the scheduled benefits. So without changes to tax laws or rates, there is a chance that after 2037 people might not be able to receive their full benefits. Also, the date of 2037 is based on moderate spending. A high cost alternative shows that funds might run out sooner. Another statistic from the IMF article titled “Pension Shock” shows that the cost of pensions are increasing rapidly, and are now near 9% of GDP, up from about 4.25% in 1970. So while there is a great history of Social Security providing benefits to retirees, or disabled people, there is uncertainty in the future of the system to continue to provide the necessary benefits to stay above poverty levels. So, what can we do?
According to the IMF article there are two options. One is to work longer. They have a graph which shows that people born from 1950-69 should work an average 2 years longer past retirement, people born 1970-89 should work around 4 years longer, and people born from 1990-2009 should work around 5 years longer on average. According to the article, that can close half of the gap. The other half can be recovered through saving more. It says that people born between 1950-69 should be saving an additional 1% of their income. People born from 1970-89 should be saving 4% more, while people born between 1990-2009 save an additional 6.5% of their income. Those figures were based off a person having continuous and stable earning over their careers. Also, that number is based on people taking that money and investing it so that it would earn a return. It cannot just sit in an account earning nothing.
So, going forward it will be that much more critical to save money, and invest it well. Also, we must teach the future generations about good money management and the importance of financial literacy, because the public pension which has worked as a safety net in the past might not always be there in its present form.