When people refer to Social
Security in the United States, they're really 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 if someone passes
away before that and they had paid into, or
paid into this social security insurance, this OASDI,
then if they pass away, it'll provide benefits
for their survivors. Or if that person
doesn't pass away, but becomes disabled
and can't work anymore, it'll also provide
benefits for them. Now, one very, very
common misconception with Social Security
is that it is somehow a form of a retirement savings
account like a 401k or an IRA. It is not that. From the government's
point of view, they actually do it more
as a kind of insurance. But in reality, all it is
a way of current workers to directly pay for the
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 to wait
for the current generation to save enough money and
only use their money. So they made it kind
of a direct transfer from the current
workers to the people who are using the benefits. And just to make
the point clear, a traditional
retirement account-- so let's say this is me over
my career, and then I retire. And this is me after I retire. And so this is as I get older. So this is I'm aging
as we go to the right. So while during
my working years, in a traditional
retirement plan, I would be putting money
into some account someplace. And so this would be the
case of an IRA or 401k. And so this is an account--
and with the cases of IRAs and 401Ks are tax deferred
and you can invest this. You invested in, you can
get some interest on it. So it can grow as
you invest it, as you put more and more money into it. And you invest it well. And then once you
retire, that money that you directly
placed there, will be used to fund your retirement. Social Security is not this. When you pay the
FICA tax, and we'll talk about that in more
detail in future videos. When you pay that
tax, you are actually not putting it into a
little separate account that you will then
tap into later. You are actually
for the most part, paying current retirees,
or survivors, or people with disabilities, you're
paying their benefits. So the way Social Security
works is more like this. You have all of 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, it's enough money to pay
for all of 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's normally informally
call the Social Security Trust, or the more formal name
is the OASDI Trust. But I'll just call it the
Social Security Trust. And the idea behind this is,
OK, we're running a surplus now. We can cover at least all
of our current obligations and we have a surplus. And then 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 as 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. But look, we had all that
saved up surplus before. And 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 the baby boomers. And we estimate 2023-- and
these things move around based on how much benefits
to retirees get, the economy, how many
people are paying into it, and a whole other
bunch of assumptions. But we estimate
is going to start shrinking in roughly
a decade from now. And the really bad
thing is this thing will be completely depleted. So we won't be able to
provide that extra funding for this kind of,
this deficit, not having enough money to
pay for all the retirees. It will be completely depleted
sometime between 2030 or 2040. And once again, this
is a good ways out. So it's based on a
lot of assumptions. But it's 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. And this will essentially
affect my retirement. By the time I retire,
in I don't know, hopefully I'm around 2042. Actually I'll probably have to
be 67, so what is that, 2045 or whatever I'm going to retire. Based on the current
taxes that are coming in, the current level of the Social
Security Trusts, the interest that the Social Security Trust
is getting on its invested money, and it's
all being invested in Treasury securities. So it's invested in Treasury. So it's not getting crazy. Interest it's getting only a
few percentage points per year. But it has to
because it has to be invested in a very safe place. So given this, there are
three 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 number
two is the benefits go down, or even
possibly disappear. And eventuality three
is, by this time frame 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 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 wont really be a lot of other
parts to the budget because you also have
Medicare also growing. And actually Medicare is a
really unsustainable one, the one that's growing even
faster than Social Security. So this is very much in
question whether there's even another part of the budget
that you could possibly even take from.