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Basics on how social security works. Created by Sal Khan.
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- What about raising the cap? I believe a person has to pay into Social Security up to $106,800 in earnings. If they make over that amount they don't pay into Social Security. Is this correct? If so, why doesn't the government raise the cap then?(51 votes)
- That is a solution, in fact, it's Barney Frank's solution: to require the rich to pay social security tax on every penny of their income, instead of just the first $106,800. If that proposal were implemented, Social Security would remain solvent until 2080-something.(55 votes)
- What is an ira and 401k?(24 votes)
- IRA is Individual retirement account to which you use to save and invest your retirement money. When you retire, you start to use this money to pay for your retirement lifestyle.
401k is similar, but it is set up by the company you work for.
You can argue this statement, but it essentially allows you to take responsibility for your own retirement funding in case government fails to fulfill its obligations. You can use to complement your pension provided by the government.(18 votes)
- At3:12, Sal mentions that the amount of money the 157m people are paying is "pretty good" because it's "enough money to pay for all of these benefits." How is it decided just how much money needs to be saved for people who are retired? If it's really "enough money" then why have your own separate 401k at all?(11 votes)
- Social Security payments should be seen as supplemental retirement income and should not be the only form of retirement savings because as Sal said, it might not be there when you retire. The reason you should put money in a 401k or and IRA is because they are in YOUR name and therefore should be there for use when you retire. Like Sal said in the video, when you pay FICA taxes, the money does not go into a social security savings account in your name to be used later when your retire. It goes straight to pay benefits to current retirees. Any surplus goes into a fund to make up for and increased retiree demand in the future. But more people are living longer and thus will reach retirement age. You should not count on getting any benefits in 50+ years because it might not be there. The amount of benefits one receives after you retire is based on how many years you have paid in to social security and how much you paid in. The more you make, the more FICA taxes are being taken out of your paycheck because it is a percentage of your gross wages.(8 votes)
- So, people(people that don't need it) are paying into Social security and then that money goes to people that need that money? Correct?(4 votes)
- I think you're viewing this from the wrong perspective. If you're 25 years old, how would you know you wouldn't need it 60 years later. Need is partially the determinant for how much a persons receives. A lower paid worker gets a larger portion of their income replaced by Social Security after they retire than a higher paid person. But remember that this is also an insurance system with many participants. It has an income redistribution element, but it also pays if one becomes disabled, or to provide support to the spouse and children of a deceased person.(11 votes)
- As the social security trust gets depleted, won't there be more people getting jobs? The baby boomers retiring definitely would affect the situation, but won't there be enough new jobs to equal it out eventually?(4 votes)
- The trust fund is just an accounting mechanism. It's not an actual box or even a bank account filled with money. If the fund is depleted, the government has many options: increase taxes, borrow to fund the shortfall, change benefits, change retirement age, apply means testing...(6 votes)
- If young people were allowed to get out of Social Security (as proposed by Ron Paul), what long-term effects would that have on the program?(4 votes)
- I think there is a this mystic notion that retirement is a guarantee in life. Folks do not save for retirement but yet still believe it is their right to retire. so, they do so, and end up living off of the government for the rest of their lives. Personal responsibility is lacking. If someone cannot afford a new car, then one doesn't buy it. If someone cannot afford to retire, then one doesn't retire. One may not be able to do the same job they always have, but that doesn't mean there aren't other jobs out there.
IMO, Social Security has done more to harm the "preparedness" for retirement than it has to help it because it has fostered a false notion about entitlement.(5 votes)
- So the FICA tax funds the Social Security benefits for current retirees?(4 votes)
- Yes, your employer takes money out of your gross wages each paycheck. The federal taxes being taken out are FICA (Federal Insurance Contributions Act) taxes which are used to pay benefits to current retirees, survivors of deceased former FICA contributors and people who become disabled. They also help fund Medicare. The FICA tax is basicly a payroll tax because they are taxes being levied whenever you earn a payroll check. When you are not self-employed you pay half of the payroll tax and your employer pays the other half. When you are self-employed you pay the full percentage of FICA tax because you are both the employer and employee. The payroll tax changes according to political whim and currently the employee half is less than the employer half because of the extension of the Bush era tax cuts.(3 votes)
- I understand that at about 2040, the projected time, our trust is expected to run out, but once the population stabilizes, or even moves upward and a stable rate, won't the trust balance itself back out? I hear lots of worry about social security being a burden, but after the baby boomer generation stops causing a loss of money, won't it just go back to normal and be a positive?(4 votes)
- Unfortunately, the 75 year financial projection by the Social Security Trustees predicts that unless changes are made (increase revenues and/or decrease growth in benefits), the Trust Funds will never be in balance. See Chart B from the 2013 Summary of the Trustees Report at http://www.ssa.gov/oact/TRSUM/index.html. The blue line represents revenues which are relatively flat throughout the remaining decades of the 21st century and the red (pink?) line represents benefit costs which continue to go up from 2050 on after a slight dip from about 2035 to 2049.(3 votes)
- If social security isn't sustainable are there any alternatives? Like people who are currently working paying into a fund that pays for their retirement.(2 votes)
- A major problem is that sustainable alternatives would require voluntary savings. This is a lot less gratifying for the public than the Social Security system. It's also extremely difficult for enough politician to be voted into office running with the idea that they plan to remove Social Security as it stands to change the program.(3 votes)
- When you think about it, like Rick Perry (who dropped out of the race), isn't this a Ponzi scheme? (See the video on Ponzi schemes)
Another thing, isn't the Social Security Trust going up and down in cycles?(3 votes)
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.