Friday, September 24, 2010

Is Social Security broke?

Pathways Advisory Group, Inc.
Jeff Karst, Associate Planner

Driving to work this morning I was listening to talk radio. The hosts were discussing how Social Security is broke and they know without a doubt, that they won’t be able to receive a single dime from Social Security when they reach retirement age. Then I asked myself, “Is Social Security really broke?”

Well, I guess that depends on your definition of broke. I constantly tell my wife that we are broke. That’s mostly so she won’t spend as much shopping for clothes and shoes. Do we have enough money to pay all the bills? Yes. Do we manage to save some each month? Yes. Then are we really broke? The truthful answer is “no”. (But I’ll never tell her that.)

When it comes to Social Security there are many people out there who like to fear-monger. They say that Social Security is “broke” in order to get folks riled up and angry at the politicians. And it works. However, the reality of it is a different story. The American Academy of Actuaries projects that in 2041 Social Security will only be able to pay 78% of the promised benefits. Until 2041, they will continue to pay 100% of benefits. This gives us about 30 years to come up with a solution. Actually, don’t think about it as “fixing it”. Think about it like maintenance on your car. After many miles, 100,000 or so, you need to perform some major maintenance in order to ensure it will last you another 100,000.

There was another time we suffered a big scare about the insolvency of Social Security. In the late 1980’s, the Social Security trust fund ran a deficit from 1984 to 1987. At that time, many people thought Social Security was going broke and would soon be dismantled. This led many to contribute more towards their retirement through 401(k) plans. In the mid-1980s, there were fewer than 8 million participants with less than $100 billion of assets in 401(k) plans. By 2006, there were seventy-million participants with more than $3 trillion of assets in 401(k) plans. Now, many of those people are only supplementing their retirement lifestyle with Social Security. Social Security was never meant to replace 100% of your pre-retirement income. But these days, most people live the same lifestyle as before because of their 401(k) or IRA.

Let’s pretend for a moment that nothing is done to ensure benefits remain at 100% of promised. Then the question is; does it matter? Most likely it does NOT matter. My generation will be much more dependent on our 401(k) or IRA than any other generation before. Social Security will become a small supplement to what we will need in retirement. Receiving only 78% of promised benefits may not be such a big deal. (My wife would only buy 78% of the shoes she wants.)

Is Social Security broke? I think the truthful answer is “No”. Does it need some maintenance? Yes.

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