Should You Count on Social Security For Your Retirement?
How often do you repeat the sentence, “Social Security won’t be there by the time I retire”, or something along the same line? I know that it’s popular to say such a thing—after all, the media is almost saturated with the prospect of a program failure here—but the better and more constructive way to approach the question is to consider if an out-and-out failure is even possible. I think it isn’t. That isn’t to say that Social Security won’t undergo significant changes, and we’ll get to that in a bit, but the complete disappearance of the program is extremely unlikely.
Why Social Security won’t disappear
Social Security is the ultimate government benefit program. The plan has been around for longer than a human lifetime, it pays benefits to more then 54 million people, and well over 100 million current workers are counting on it to help pay for their retirement at some point in the future. A plan of that magnitude won’t (and can’t) just disappear. Political forces alone won’t allow that to happen. Since nearly the entire population of the US is either dependent on Social Security, or will be in the future, it would be one of the last programs eliminated in even the worst of economic crises. Apart from the implications for retirement, it’s estimated that Social Security keeps at least 40% of the population over the age of 65 out of poverty. The elimination of the program then would result in many millions of people being plunged into poverty. The only way that Social Security can fail is if the entire US Government were to fail. Were that to happen, the implications would go well beyond Social Security! Retirement planning of any sort would be useless, since retirement itself would disappear.
What’s more likely to happen with Social Security
The worst—the complete end of Social Security—is unlikely to happen. But that doesn’t mean that major changes aren’t on the horizon. The system actually turned small deficits during 2010 and 2011 for the first time in the program’s history. Some of that has been due to the recession, but more is due to a shift in demographics. The long foretold retirement of the Baby Boom Generation—the largest generation in US history—has finally taken root. Not only did the oldest wave of that generation begin retiring and collecting benefits beginning in 2008, but the same group began joining the Medicare program in 2011. That will mean severe stress on the program for at least the next 20 years. In addition, many of the new jobs being generated in the economy are on the lower end of the pay scale, which means less money for Social Security contributions needed to fund the program. None of those problems means that the program will be eliminated—or “go bankrupt” as is often reported in the media. What’s far more likely is one or more of the following:
- Benefits will be cut
- Retirement ages will be extended (beyond those already in place)
- Benefits will be paid out in inflated dollars that won’t have nearly the purchasing power of today’s currency, or
- Benefits could be means tested, excluding higher income retirees from receiving them.
The good news is two-fold: the Social Security program won’t disappear completely, and we’ll have time and opportunity to prepare for the reductions that are coming.
What we need to do to prepare for the more likely outcome
We have a choice when it comes to Social Security—we can either give into the panic of the moment—and convince ourselves that the program won’t be there when our turn comes, or we can begin now to take steps to prepare for a retirement where Social Security will provide a reduced income stream. Since we can see the changes coming, advanced preparation is the only logical course of action. Panicking or throwing up our hands will accomplish nothing! So what can we to do to prepare ourselves for less generous Social Security benefits? Maximize retirement investment savings.
There are various ways to prepare for a retirement with less Social Security—paying off debt, lowering our cost of living, even moving to areas with lower living costs. But since Social Security is a source of income, the single best strategy for preparing for its reduction is to increase other income sources to replace that which will be lost. First and foremost that will mean increasing the size of your retirement investments. That will begin with participating in every retirement investment plan available to you—a 401K or 403B program at work, and traditional or Roth IRAs outside of work. Once you’re in a plan, make the most of it by making the largest contributions allowed by the plan and that you can comfortably afford. That may mean cutting back on other expenses in your life, but those cuts will be well worth the effort and sacrifice once retirement does come. After all, the time to plan for a Social Security-lite situation is NOW—while you have the time and options to do so. Waiting until just before you retire will almost certainly be too late.
Photo by 401K via Flickr