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
If you enjoyed this article, please visit Tough Money Love and subscribe to his RSS feed. We would appreciate your comments and reactions, so if you would like to contribute to the discussion, add your comment below.
Updated February 10, 2011 and originally published November 28, 2008.