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Video transcript

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.