Imagine you're on a boat that has sprung a leak. The damage to the hull can't be repaired, so the vessel is constantly taking on water. It's not a good situation. Fortunately, there are 20 able-bodied passengers aboard to help bail, keeping the ship afloat.
But after a while, one of those exhausted passengers stops bailing. Then another stops, and another. One by one the remaining bailers give up their efforts, until there are just two left.
If you have a job right now, then you're one of these last two passengers. It's your work, your "bailing," that keeps the Social Security system afloat. In the early days, there were 20 workers just like you depositing into the system for every one retiree receiving benefits. Over the years, that ratio fell to 15:1, then 10:1, then 5:1. Now, there are just over 2 workers per beneficiary.
Of course, when it comes to Social Security, there isn't a threat of anything filling up, but rather of it being drained dry. But either way you look at it, we're stuck with the same problem: All taxpayers and retirees are crammed in this boat, which is looking less seaworthy by the minute.
The U.S. Government's Slowly Sinking Ship
According to Forbes, workers sent in $646 billion in Social Security payroll withholdings and taxes last year. That's objectively a lot of money, but it still fell short of the $714 billion in promised benefit payments.
In other words, there is substantially less money coming in than going out.
This has been the case ever since 2010, and those deficits are projected to get wider and wider with each passing year. You don't need a Ph.D. in mathematics to understand that this dire situation is untenable.
Now, the government can use creative accounting to help plug some of the gaps. Tapping into interest earned on money deposited in the Old-Age and Survivors Insurance (OASI) trust fund is working for now. But by 2020, the interest will be insufficient to cover the shortfall and the trust fund will have to start selling off assets to maintain benefits.
That's when things really start getting ugly.
Simple demographics mean the shortfall will only get worse in the years to come. Every day, 10,000 Baby Boomers become eligible to start drawing benefits. That's 300,000 fewer people paying money in each month -- and 300,000 more taking it out.
According to experts, the Social Security trust fund will be exhausted (i.e. no bond assets left to sell) by 2035. At that point, we will be out of options. The government will then have two equally terrible options: to hike payroll taxes by 32% or slash benefit payments by 25% across the board.
Retirees are already howling mad because payments (which are adjusted for inflation) didn't get a cost-of-living increase last year. But there is a huge difference between a 0% increase and a 25% decrease. And you know hardworking families won't stand for such a significant tax increase.
Moving On From A Broken System
Sure, we could raise the retirement age to 70 as some have suggested. But I for one don't relish the idea of punching the clock that long. There just aren't any easy solutions. And that's why there hasn't been any real legislative push to shore up Social Security since 1983.
Personally, I'm not relying on Uncle Sam to meet my retirement needs. If there is still money in the system in 2036, that's great. But at the rate the system is hemorrhaging money ($253 million per day), I'm taking charge of my own financial future well before then.
The key is to have a second income source that is free of the shackles and restraints of Social Security. Over at my premium newsletter, High-Yield Investing, my research staff and I call it "Social Security Insurance."
Regardless of what happens in Washington, this revenue stream can put an extra $43,543 in your pocket each year. You also have the option of taking a lump-sum payment every now and then (maybe to pay for a vacation). And any assets that remain unspent can be passed down to the beneficiary of your choice.
If you to free yourself from relying on the fragile Social Security system, I invite you to click here.
This article originally appeared on StreetAuthority.