What A Disaster! Social Security May
Be Gone When You Retire
If you are 30 and
above you will recall that your parents and uncles used to tell you that Social
Security benefits is something all tax-paying workers could count on.
Basically, as a working adult, a portion of your salary would be automatically
deducted from your paycheck via payroll
tax. This regular deduction serves as a financial security for you because, in
a return, you will receive monthly Social Security payments and Medicare when you retire[i].
Since the 1935 when
Social Security started[ii] the program worked very well. As Oliver S.
Mitchelle, the Director of Pensions Research Council at Wharton School of the
University of Pennsylvania, put it: “Today’s employees would raise the revenues
to pay current retirees, and were assured that when their time to retire came,
the current employees of the day would pay into the system to finance their
retirement”(as cited in Kramer, 2013).
Why Social Security Money Will One Day Run
Out
As a practical matter,
unless the US government fails, Social Security payments will never stop going to the beneficiaries.
The phrase “running out of money”, as used here, means that, eventually such payments
will start getting smaller and smaller because the money we are drawing
down from the Social Security Fund(otherwise called Old Age, Survivor, and
Disability Insurance[OASDI] fund) is increasingly getting bigger than what we
are paying in[iii]. The
recent financial crisis and recession, which increased the unemployment rate,
is one of the factors that increased the pressure on Social Security payments.
Added to this is the size of the aging baby boomer population – the 77 million
people who were born in the U.S. between 1946 and 1964 – many of whom are
expected to live far past age 65. The existence of these two factors implies
that the money coming in from payroll tax revenue may eventually be
insufficient to pay out full Social Security benefits. So it should not be a
surprise that many people who are well-informed are worried about the very future of Social
Security. As a matter of fact, it makes sense that young people should seek for answers as to whether
Social Security will be there for them when it is their turn to retire. The bottom line here is that if Congress want
Social Security to continue to exist as it does today, they must figure out a
way to increase the amount of money that goes into the OASDI fund. Without this, the only option in the long run
is for Social Security to resort to paying out reduced benefits.
The message for the
younger generation (those born in the 1970s through 1990s) is
clear: Do not rely on Social Security as a way to support your retirement. Your
best option will be to depend on your own savings and investments. As Ellen Derrick, a certified financial planner
for LearnVest Planning Services puts it: “People need to ask themselves: ‘What
can I do to make sure I am protecting myself
for the future, a future that may not include Social Security?’” (as
cited in Kramer, 2013).
The Social Security
Board of Trustees have noted that, starting from the year 2032, there should be
enough money coming into the program to pay out only about three-quarters of
total expected benefits.[iv] What this means is that anybody receiving,
say, $1000 a month, will only receive $750 starting from that year. It is
projected that such benefits should be intact through the next 54 years,
counting from 2032. One of the reasons this may occur is that the law requires
Social Security Administration(SSA) to only pay benefits based on the amount of
revenue it has collected. Hence in a situation whereby the amount of revenue
that SSA has is insufficient, the
U.S. government will have to find out
new solutions, or source of funds, if it does not want SSA to cut payments – a move that would obviously
require policy changes.
The Core of the
Matter: How You Can Prepare Yourself
The unhappy truth here is that you will need
to prepare yourself for the possibility that, when it is your time to retire,
the full amount of social security benefits won’t be there. First, keep working and save lots of money:
You need not worry if you have already retired, or if you are close to retiring
since your social security benefits are secured. However, you should consider
buckling down if you are at least 10 years away from retirement. In a practical
sense, it is best not to include social security in your retirement plan
calculations if you are 55 or younger this year. This is because, if you did
get benefits at all at retirement, the amount you will receive will most likely
be smaller than what you are currently being promised[v].
Second, delay your retirement until as late
as possible. The logic of this approach runs as follows: The earliest available
age to claim social security benefits is 62 years. However, if you defer
claiming benefits until age 70, you will enjoy an added benefit built into the
SSA system – your monthly benefits could go up by as much as 76 percent.[vi]
Right Problem,
Right Solution: How Much To Save?
The fundamental lesson here is that your best
bet is to spend less and start saving more while you are still working. Also,
if possible, save as much as 10-20 percent of your monthly income. Don’t forget
that the best financial security you can have when you retire is to invest your
savings in a retirement fund, particularly in index funds such as the T. Rowe Price Equity Index Fund(S & P
500), Vanguard Index 500 Fund, Merrill Lynch Small Caps Index Fund and Wilshire
5000 Index. Note that the more you can save and invest, the better for you. The
bottom line: Longevity is increasing, and due to the advances in healthcare, it
will soon become the norm for people to start living to over 100 years. This
implies that you may live a lot longer than you expect. So I am emphatically
suggesting that you will need many more years of saving, unfortunately. If you
your employer offers you a 401k retirement plan with a contribution-matching
program, grab it! You don’t want to
reject a free money from your employer. If you have your own business, and
hence is self-employed, it will be a good and smart move to set up a
traditional individual retirement account, individual 401k account or a Roth
IRA. If you have any of these accounts,
your gold standard should be to contribute the maximum amount those plans
allows for each year. Don’t be deceived
by the myth that stay-at-home mums cannot have an IRA. The fact is that they
can: As a practical matter, they can set
up such accounts in their names and deposit the incomes they receive from their
spouse.
Staying Afloat at Retirement Requires Good Health
If you are willing to do the right thing
necessary for staying healthy(such as
regular exercise, eating healthy foods, etc), you can protect yourself now for
later on in life. There are two reasons
for this. First, you can work longer and
even reduce medical expenses when you are in your retirement years if you are
healthy. Second, when you are healthy,
you remain mentally alert and connected to friends. So you can still work at
your own pleasure and make extra cash while doing something you love.
One more thing that can help you to stay
healthy is to make the optimal use of your social capital: family, friends,
neighbors and community. Your mental health will be greatly enhanced if you
do so.
The logical deductions from the analyses made
so far is simple: It is best to start early to prepare and save for your
retirement. It does not matter if you
start with a small amount at first. Don’t be like other people who comes up
with all sorts of reasons to postpone saving for their retirement. You will
have more money to throw around at retirement if you start early to save.
Sources
[i] Kramer
L.(2013): Will Social Security Be Gone When You Retire? MSN Money. Retrieved October 29, 2013 from http://money.msn.com/retirement/will-social-security-be-gone-when-you-retire
[ii] Social
Security(n.d.): Frequently Asked
Questions. Retrieved October 29, 2013 from http://www.ssa.gov/history/hfaq.html
[iii]Teal G. (2013):
How Accurate Is the Concern that Social Security Money Will One Day Run Out? Forbes. Retrieved October 29, 2013 from http://www.forbes.com/sites/quora/2013/08/28/how-accurate-is-the-concern-that-social-security-money-will-one-day-run-out/
[iv] Kramer
L.(2013): Will Social Security Be Gone When You Retire? MSN Money. Retrieved October 29, 2013 from http://money.msn.com/retirement/will-social-security-be-gone-when-you-retire
[vi] Ibid
