Social Security Intro Basics on how social security works
Social Security Intro
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- When people refer to social security in United States, they really are referring to the OASDI which
- stands for - Old Age, Survivors and Disability Insurance.
- And it is exactly what this acronym implies it is.
- It provides retirement benefits when someone retires or when someone passes before that and they had
- paid into or paid into the social security insurance, this OSADI
- And when they pass away then it provides benefits to their survivors.
- Or if that person doesn't pass away but becomes disabled, and can't work anymore, it will also
- provide benefits for them.
- Now one very very common misconception with social security is that it someone is a
- retirement savings account like a 401(k) or an IRA.
- It is not that. From the government's point of view they view it more as a kind of insurance, but
- in reality, all it is, is a way for current workers to directly pay for retirement of existing retirees.
- And the reason why they did this is when it started off in 1935, they wanted the
- current retirees to immediately get benefits. They didn't want the current generation to
- save enough money and only use their money, so they made it a direct transfer
- from the current workers to the people who are using the benefits.
- To make the point clear, a traditional retirement account - let's say this is
- me over my career, and then this is when I retire, so this is when I get older
- I am aging as we go to the right. So while in my working years, in a traditional
- retirement plan, I would be putting money into some account some place.
- This is the case with an IRA or a 401k. So this is an account, an account some place
- And in the case of an IRA or 401k, they are tax deferred and you can invest this and you
- can get interest on it. So it can grow as you invest, and put more and more money into it.
- And if you invest it well. And once you retire, all that money, that money that you directly placed
- there will be used to fund your retirement. That money will be used to fund your retirement.
- Social security is not this. When you pay the FICA tax, we'll talk about that in more detail in future videos,
- when you pay that tax, you're not actually putting it into a separate account
- you will then tap into later. You're actually for the most part paying current retirees or survivors o
- r people with disabilities, you're paying for their benefits. So the way social security works
- is more like this. You have all the current workers paying their FICA taxes You have all the current
- workers paying their FICA taxes. And right now, at least I think these numbers
- are as of 2010, you have 157 million people paying into social security. And you have 54 million
- people receiving social security. And so this ratio is pretty good, this money is right now as of 2010
- 2011 is enough money to pay for all these benefits and actually we are running
- a little bit of a surplus, and that surplus is put into a separate trust account.
- And it is informally called the social security trust, or the more formal name is
- the OSADI trust. I'll just call it the social security trust. And the idea behind this is, OK, look, we're running a surplus now
- we can cover at least all of our current obligations and we have a surplus.
- And as more baby boomers retire and more people go from this side of the equation to this side
- of the equation, then we can use the trust to kind of make up any deficits we might have.
- Because if we have more people on the right, we're going to have to spend more and
- we're going to have fewer people on the left so we're going to have less coming in
- Well, look, we had all that saved up surplus before so we can use that. And that might
- sound like overall a decent idea but the problem is that this trust is going to start shrinking because
- of all the retiring of all the baby boomers. Start shrinking and we estimate 2023, and these things m
- move around based on how much benefits retirees get, the economy, how many people are paying
- into it and a whole other bunch of assumptions. They estimate it is going to start shrinking roughly
- a deacade from now. And the really bad thing is, that this thing will be
- completely depleted so it won't be able to that extra funding for these kinds of deficits not having e
- enough money to pay for all the retirees. It will be completely depleted
- sometime between 2030 and 2040. Once again, this is a little ways out but
- it is actually not that far out. This is actually going to affect - Let's see
- I'm right now 35, in 2011, so in 2031, I'll be 55, so I, this will potentially affect my
- retirement. By the time I retire, I dunno, 20 - hopefully I'm around - 2042. Actually I'll
- probably have to be 67. So I'll have, what is it, 2045 or whatever
- I retire - based on the current taxes that are coming in, the current level of the
- Social Security trust, the interest the social security trust is getting on its invested money,
- and its all being invested in treasuries securities, so it's being invested in treasuries, so
- it is not getting crazy interest, it's getting like only a few percentage points
- per year. But it has to, because it has to be invested in a very safe place - given this,
- there are 3 possible eventualities. Either the FICA tax goes up,
- so based on the number of people working here you get more revenue per person right over here.
- Eventuality #2 is the benefits go down or even possibly disappear. And eventuality #3
- is by this timeframe right over here, that other parts of the government's budget
- is going to have to fund social security to make up the shortfall because
- if you don't have enough revenue coming from the FICA tax and you don't have enough money from
- the social security trust so other parts of the budget. But as we'll see, there won't be a lot of other p
- parts to the budget because you also have medi-care growing and really medi-care
- is the really unsustainable one. The one that is growing even faster than social security.
- So this is very much in question whether there is even another part of the budget that you can even
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