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The Other Looming $7 Trillion Financial Crisis: Social Security

Politics / US Economy Mar 04, 2009 - 09:49 AM GMT

By: Money_and_Markets

Politics Best Financial Markets Analysis ArticleNilus Mattive writes: My new retirement report just went to press yesterday, so the material is fresh in my mind. And while I can't share the contents with you here in Money and Markets , there is one topic in that report that I want to talk about today.


It is a financial crisis that will affect nearly all of us in profound ways. And it's been pushed to the backburner given all the other financial shenanigans happening today.

I'm talking about Social Security, of course.

Let me tell you …

The Problems Go Back to the Beginning of the Program!

When Social Security was first instituted in 1935, it covered about half of the population. Many teachers, nurses, librarians, and other workers were excluded from coverage. What's more, the average life expectancy was about 60.

Today, Social Security covers virtually everyone. The average American is living to age 76.

And although the initial 1937 payroll tax rate of 2 percent (split between employer and employee) has risen to a combined 15.3 percent (including Medicare taxes), the system still isn't bringing in enough money to cover everyone.

Remember, Social Security is a “Pay-As-You-Go” system … meaning money comes in and goes out fluidly. That poses a big problem, especially with a huge number of baby boomers getting set to retire over the next decade.

A smaller pool of contributors paying for a larger and longer-living group of recipients is a recipe for disaster!

In fact, the program is expected to begin taking in less money than it pays out starting in 2017. That's just eight years from now!

And by 2041, Social Security will only be capable of paying out 78% of promised benefits.

As of right now, you can expect the system to continue paying out full benefits through 2041.

But that's only because Social Security will tap its “trust fund,” a bunch of IOUs from various government agencies that borrowed money back when the program was running a surplus.

President Obama has few options when it comes to Social Security fixes ...
President Obama has few options when it comes to Social Security fixes …

It's not like these other government agencies actually have the money on hand, either. So they'll borrow to pay back the money they owe Social Security.

By the way, we're talking about a $7 trillion shortfall!

In light of all the other bailouts and money pumping happening right now, you can see just how bad the situation really is.

How Might Washington Repair Social Security?

It's simple, really. There are only two ways to solve the Social Security crunch:

A. Pay out less benefits

B. Get more money into the system

So far, President Obama's stated preference is “B.”

Currently, a combined 12.4 percent of income — up to a $102,000 cap — is put in for Social Security.

In the past, Obama has said he is not in favor of removing this cap. Instead, he would like to enact an additional 2 percent — 4 percent tax on anyone earning more than $250,000.

Some insiders have suggested this plan, if passed, wouldn't take effect until ten years from now. And even if it took effect immediately, the Tax Policy Center estimates it would add $396 billion over 10 years.

In other words, it's a good start at best. More changes will be needed. And you can bet that lower benefits and higher taxes will both figure into the final solution.

In my opinion, that's all the more reason for you to save as much as you can for your own retirement AND to take advantage of as many tax-sheltered accounts as you can.

Best wishes,

Nilus

P.S. Even though Social Security is in big trouble, I do not expect anyone nearing — or already in — retirement to be adversely affected.

In fact, I have found at least five ways for you to potentially boost your Social Security payments. All the details are in my retirement report that went to press yesterday.

If you didn't get your copy, click here to get your copy of “The Weiss Guide to Worry-Free Retirement Profits” immediately .

This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .

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