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Current time:0:00Total duration:6:29

Video transcript

when people refer to social security in the United States they're really they're really referring to the OASDI which stands for old age old age old age survivors survivors and disability insurance disability 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 the Social Security insurance this Oh a SDI then and if they pass away it will 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 is somehow a form of of a retirement savings account like a 401k or an IRA it is not that from the government's point of view they actually view it more as a kind of insurance but in reality all it is 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 a kind of a direct transfer from the current workers to the people who are who are using the benefits and just to make the point clear a traditional retirement account so let's say that this is me over my career 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 into some account someplace and so this would be the case of an IRA or a 401k and so this is an account an account someplace and with the cases of IRAs and 401ks they're tax deferred and you can invest this and you can get you can get some you invest it and 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 money that you directly placed there will be used to fund your retirement that money will you 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 retirement 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 you have all of the current workers paying their FICA taxes and right now or at least I think these numbers are as of 2010 you have 157 million people paying into Social Security and you have if you have and you have 54 million people receiving 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 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 called the Social Security trust or the more formal name is the OASDI trust but I'll just call it the Social Security the Social Security trust and the idea behind this is okay look 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 have spend more and we're going to 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 is that this trust is going to start shrinking is going to start shrinking because of all the retiring of the baby boomers start shrinking and we estimate 2023 and these things move around based on how much benefits the retirees get the economy how many people are paying into it and a whole all other a bunch of assumptions but this is 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 this will be depleted so it 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 I'm 35 in 2011 so in 2031 I'll be 55 so I this will essentially affect my retirement by the time I retire and I don't know 20 hopefully I'm around 20 40 to 20 you have to be 67 so I'll have you know 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 trust 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 not you know it's getting only a few percentage points per year but it has to because 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 eventualities the benefits go down or even possibly disappear the benefits go down and eventualities is by this timeframe right over here that other parts of the government's budget I was going to have to fund Social Security 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 other parts of the budget but as we'll see there won't really be a lot of other parts to the budget because you also have Medicare also growing and actually Medicare's the 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