About the author: This guest post comes to you from Mr. ToughMoneyLove, a baby boomer who dishes the hard truth about money and personal finance at his Tough Money Love blog.

I cannot count the number of times I have seen or heard statements proclaiming with great certainty that Social Security will “disappear” or that “it will not be there for me.” The frequency and intensity of these dogmatic statements seem to be inversely proportional to the ages of the people making them.

Social Security disappearing? It’s a myth.

Social Security may evolve and change but it’s not disappearing.

Believing in the mythical demise of Social Security is bad policy for anyone planning their financial future. Such a belief is also unfair to those generations ahead of you.

Before I explain, let me distinguish rash predictions of the end of Social Security from more level-headed proclamations that “I am not counting on Social Security.” Statements that fall in the latter category are actually beneficial because they create personal incentives to save and invest for retirement.

Why Social Security is not Going Anywhere

Baby Boomers won’t let Social Security fail. There are approximately 77 million baby boomers preparing to retire. A few have just now reached retirement age. According to numerous research studies, millions of middle class baby boomers are woefully unprepared for retirement. These millions will clearly need Social Security to have any chance at a decent standard of living in retirement. Does anyone honestly believe that Congress will stand idly by while Social Security crashes and burns, undermining the financial stability of millions of middle class baby boomers?

Even if Congress was inclined to let Social Security unravel, boomers would vote them out and replace them with AARP-friendly politicians. We boomers vote in big numbers. The AARP is a strong Social Security advocate. It has 35 million members, which is ten times the size of the National Rifle Association. The AARP has an $800 million budget, five times that of the U.S. Chamber of Commerce, the country’s largest business association. The AARP is surpassed in membership only by the Roman Catholic Church. As boomers continue to age, AARP membership and voting clout will only increase. Do you know who killed Bush’s plan to privatize part of Social Security? It wasn’t the whining Democrats. It was the AARP. Can you feel the power?

Simply put, Social Security is going to be rock solid necessary for at least the next 30-40 years, until the last of the boomers moves on to the next life.

Younger generations will need Social Security. The younger readers are still skeptical. I’m not a boomer, you say, so why should I think Social Security will be there for me? The answer is that post-baby boomers – the younger generations – are also going to need Social Security.

Let me explain with some numbers, using my wife and me as an example. If I wait until age 70 to claim Social Security retirement benefits, and when my wife reaches retirement age, we will be entitled to receive a combined monthly retirement benefit (in today’s dollars, using current calculations) of $4600. Now let’s assume that Social Security is not there and I needed to replace that $4600 with income from investments. Using a 4% rule of thumb annual retirement withdrawal rate, I would need a retirement nest egg of $1,380,000 just to replace our Social Security benefits.

How many of you are counting on having well north of $1 million (in today’s dollars) in place, just to replace the Social Security benefit that you think won’t be there? Maybe you had confidence a year ago that you would, but how about after the 40% market drop that we’ve all experienced? There has been a paradigm shift in investment confidence levels at all age groups. We are recognizing that 10%-12% annual market returns are gone indefinitely and perhaps for our collective lifetimes. We actually need to do better than that to recover from the damage of the past four months. With that recognition in place, all but the wealthiest working adults in all age groups must embrace the continued existence of a Social Security retirement system. When it comes to building multimillion dollar retirement portfolios, many are called but few are chosen.

Social Security Fixes are Doable. If I have persuaded some of you that maybe this Social Security thing isn’t so bad after all, you may still doubt whether it can be fiscally sustained even with good intentions. The reality is that although the Social Security system needs work, many experts believe that the funding crisis has been grossly overstated. (Medicare is a separate problem.) The misconceptions about the financial stability of the Social Security Trust Fund are many and are nicely summarized by the Center for Economic and Policy Research as a solution in search of a problem.

I am not going to detail all of the different options that are available to improve the actuarial health of the Social Security system. They include bumping the retirement age by a year or two or slightly increasing the limit on the Social Security wage base. Heck, even immigration reform could solve the problem by adding millions of younger workers paying into the system. The key point is that there are fixes.

What does all of this mean to you? Probably the most important take-away from what I have written is that you should not automatically write-off Social Security when formulating your retirement plan. If you do, you may end up taking excessive investing risks as you attempt to compensate for having no income stream outside of your retirement investments. That could backfire on you in a big way.

And by the way, if you younger folks decide you don’t want Social Security at all, please keep quiet about it. Otherwise, the AARP may use its clout to get some new laws passed that you won’t like one bit.

Photo credit: Fabricator of Useless Articles

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CNN Money is presenting an in-depth feature explaining where President-elect Obama stands on a variety of economic issues. Here are some highlights:

• Temporarily eliminate taxes on unemployment benefits.
• Tax oil profits and use the money to help fund $1,000 rebate checks for consumers hit by high energy costs.
• Tax carried interest as ordinary income rather than as an investment gain, thereby subjecting it to much higher tax rates than 15%.
• Raise capital gains and dividend tax rates to 20% from 15% for couples making more than $250,000 and singles making more than $200,000.
• Require any financial institution participating in Treasury’s Troubled Asset Relief Program to put a 90-day moratorium on foreclosures for homeowners “acting in good faith.”
• Leave all tax cuts in place for everyone except couples making more than $250,000 and single filers making more than $200,000. Those high-income groups would see their top two income tax rates revert to 36% and 39.6% from 33% and 35% respectively.
• Provide a federally funded match on retirement savings for families earning below $75,000.
• Raise minimum wage to $9.50 an hour by 2011 and tie future rises to inflation.

Those are just a few of the changes Obama would like to bring to the economic system in the United States. There are many more points outlined by CNN Money. I encourage everyone to read through the list to understand what the new president’s economic goals will be.

Feel free to discuss in the comments of this post for economic thoughts or in the Consumerism Commentary Community (C3) for general thoughts about the election.

Update: If you tried to register to participate in the C3 today and couldn’t, please try again. I was just informed that there was a problem with the registration page.

If you do anything else today (and you live in the United States), make sure you find your polling location and vote. While the outcome of today’s presidential election may seem like a foregone conclusion, keep in mind that there are many other important issues and races that are in need of your vote.

I will be placing my vote later this afternoon.

Many news outlets have instated hotlines that can be contacted if you experience any problems voting. This year, not only are traditional telephone operators ready to receive your calls, but individuals are monitoring email and Twitter as well.

CNN includes a map to show which states are lodging the most polling complaints. To submit a complaint (42,500 complaints have been received so far), call 877-GOCNN-08 or share your story online.

NPR also offers an interactive map showing the country’s hot spots for polling complaints. To report a problem to NPR, send a text message to 66937 and begin the message with #votereport. Include your zip code, and a brief description of the problem. You can also post a message via Twitter with #votereport within the message.

The Federal Reserve Board responded to the economy yesterday by lowering the target for the federal funds rate to 1% and the discount rate to 1.25%.

The first number is the rate usually in the news. The federal funds rate is the interest rate that banks charge to lend their balances to one another. If one bank wants to loan $30m to another bank, the two companies can negotiate the rate and the lending back and charge the borrowing back the rate agreed upon. By lowering the federal funds rate target, the Fed is saying they’d like to see this interest rate around 1%. The true lending interest rate is controlled by the market, guided by the Fed.

When banks borrow money from the Federal Reserve, the discount rate serves as the interest rate for the loan.

The federal funds target rate hasn’t been as low as 1% since June 29, 2004, having reached that level over a year before on June 25, 2003. A low target rate, and the ensuing availability of easy credit, possibly contributed to today’s credit crisis. But today’s low target rate will have a different effect, according to the policy makers. They believe low rates will increase liquidity between banks and encourage more—but sensible—consumer lending.

It might not be enough. Here’s the important part of the Federal Reserve’s statement yesterday:

Recent policy actions, including today’s rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

“Downside risks” and “will act as needed” probably signal more rate cuts to come in the future. But there isn’t much further you can go from here. The Federal Reserve could cut the target rate to 0%, but that would be a first, I believe. If banks still aren’t lending to each other at that point, the only other option is simply printing money.

Inflation would increase, making it more difficult to afford the same living standards unless inflation is accompanied by growth in salaries. The current jobs market doesn’t make salary growth seem likely.

So what does this mean for me?

The moves by the Federal Reserve don’t affect interest rates on consumer loans. Rates on long-term mortgages will not change dramatically due to changes in the federal funds rate or the discount rate. Adjustable rate mortgages might see a decrease in interest rates. Many ARMs are tied to a different rate entirely, the LIBOR. The LIBOR has been slowly decreasing, as well.

Savers are in for bad news. Interest rates offered by banks for savings account usually follow the movements of the federal funds target rate, but some banks may follow the LIBOR movements. A number of banks have decreased their interest rates recently, and I expect that to continue.

Yesterday, the Dow Jones Industrial Average lost 514 points, making October 22 yet another day among the top ten worst days on Wall Street. But it’s the credit crunch that we’re feeling on Main Street. Until the banks start lending to each other again, it’s difficult for small businesses and individuals to find loans necessary for their needs and other businesses are finding it difficult to raise capital. In all likelihood, we’re in a legitimate recession.

Here in the United States, our investments in stocks are down and some of us are reportedly losing jobs. We might have less extra money to play with. Foreclosures on property are rising.

But when we need food, even if we are eating out in restaurants less, we are not in danger. As always, we can walk or drive to the grocery store or the farm market. The shelves are full. Food is still plentiful in this country, and it no less affordable than it was one year ago.

There is no crisis here. Some of us might have to deal with a little less spending money, but the recent financial downturn has had little effect on our ability to survive. That’s not the case everywhere in the world, however. For example, Zimbabwe is suffering due to economic mismanagement. While Wall Street here mismanaged the financial industry and the government mismanaged regulation over the past decade or so, these issues cannot be compared to situations around the world.

Farmers are without seeds, fertiliser and fuel. Next year’s harvest is already being written off as a disaster as well…

Some Zimbabweans get by on one meal a day if they are lucky, but there is a growing sense of desperation. One consequence is that thousands of children are said to be dropping out of school to look for food… Wads of cash are needed to buy what food is available in towns…

One villager in Mashonaland West pleaded for help before it was “too late.” “If we don’t get help now, most of us are going to die. Nearly everyone here is starving.”

Back here in the United States, many lives may be uncomfortable in this recession. Keep in mind, however, that there is no food shortage and no gas shortage. Children will still receive Christmas gifts from their families this year and will not be forced to quit school in order to earn money to support their families.

Life in this country is quite good, even though it’s easy to forget that, with no help from the financial media. But looking deeper, the real story is not much different than always. I was invited to write an article for PC World Magazine about finding deals for “Black Friday.” If the economy in this country were truly in trouble, I’d either be writing about how to find food or not writing at all; comforts like internet access and magazines would be abandoned in favor of the necessities for survival.

With this in mind, I’m still investing in the United States.

Photo credit: rosemary_mcd
Zimbabwe starves as despair grows, Peter Biles, BBC News, October 23, 2008