Social security's looming shortfall

"Sometimes I worry that if I ever can retire and do get Social Security payments, they'll be a lot less than what I've been promised," I said to my CPA, Louie the Number Cruncher.

"There is some reason to worry, Tommy. According to the Social Security trustees' latest report, the two trust funds that support the program will run out of reserves in 2035. If that happens, beneficiaries like you will get only 80% of the benefits they're owed."

"But I thought Social Security was an insurance program, not a typical government program!"

"Well, Tommy, when FDR signed it into law in 1936, it was considered an insurance program. Workers contributed money to it through income taxes. When they retired, they drew money out."

"So how can the government arbitrarily cut my benefits?"

"The Supreme Court ruled long ago that policymakers could change Social Security's benefit formula to reflect shifting conditions. They can cut benefits anytime, and they've done so many times."

"But that's not fair! I've been self-employed for a long time, and I know I've paid big money into Social Security every year."

"That's the breaks, Tommy. Millions of baby boomers are retiring. The ratio between people paying into the program and people drawing out is shrinking fast. In 1950, 16 workers paid in for every person drawing out. Today, just 2.8 workers pay in for every person drawing out."

"But Social Security has run surpluses for years! Surely there's some huge pile of dough that the government can tap when I retire."

"The Social Security trustees do report a nearly $3 trillion surplus. But as surpluses have rolled in, the government has used the money to purchase special Treasury bonds, then used that money to fund other programs."

"The government borrows from itself?"

"No, Tommy -the government borrows from you! Look: In 2035, reports The Motley Fool, baby boomers will have mostly retired, with only 2.2 workers paying into the system to fund each beneficiary. To cover the shortfall, the government will need to cash in those bonds. Guess where it'll get the money to pay off the bonds."

"Future taxpayers?"

"Correct, Tommy. The government will need to cut benefits or raise taxes -and will likely do both. As the trustees say, benefits would have to be cut in 2036 to 80% of what's promised unless taxes are increased."

"I read that since 1936, Congress has raised Social Security taxes more than 40 times."

"Correct again, Tommy. The trustees say a tax increase of 4% -half paid by employers, half by employees -would stave off the shortfall. Others are floating ideas to expand the Social Security program."

"Expand a program that's struggling for funds, Louie?"

"Democrats in the House have introduced the Social Security 2100 Act, which would increase both benefits and taxes. Today, workers pay Social Security taxes on income up to $132,900. This bill would have high earners pay additional Social Security taxes on income of $400,000 or more."

"That's a big 'Ouch!' for high earners."

"Tommy, the sooner our Social Security challenges are addressed, the better off the program will be. People are living longer. Many retirees rely on Social Security to pay their bills. It's time for Congress to get cracking."

"Well, Louie, knowing Congress, I'm not holding my breath. But I think I'll add some names to my Christmas list -the 2.2 workers who'll be funding my benefits when I retire!"