Thoughts On Social Security

Social Security is clearly one of the main sources of income that most of the boomers are hoping to use in retirement. Pensions, IRAs, 401ks, and annuities round out the list, to be sure. But what happens when Social Security goes bankrupt? Indeed, for those of us who are Gen X or Gen Y, benefits from Social Security and Medicare seem less certain. At a recent party I discussed this with someone who quickly met me with the statement “there won’t be any social security when we retire.” That is the hallmark of the current state of Social Security.

Spending More than it Makes

Social Security is in trouble. We’ve been hearing about this for years; people have written chapters in books, had articles published in newspapers and magazines, and its likely even been on your local news at one point or another. President Bush proposed a plan to put social security into private accounts.

Bigger Than a Breadbox

The source of the problem with social security is that there will be more people entitled to the benefits once all of the baby boomers retire than there will be people pouring money into the system. Until recently, I thought that this was the only issue with Social Security, but recently by reading some comments on an article, I realized there was another factor.

Immigration

When it comes down to immigration, some think that the issue of Social Security will be resolved because more people will immigrate and therefore pay taxes into the system. Personally, I think that the difficulty for people to legally immigrate is forcing many to remain here on visas etc instead of becoming citizens. However, there is also a large amount of people living here who are not paying into the system.

Many of these concerns were met in a messageboard I read recently on Morningstar.

Indeed, this was a comment to an article on the topic by “yobria”: A new wave of massvie immigration is not going to save entitlement programs. When the demographics shift dramatically you may just find the new majority feels no obligation to help out the older majority.

Yobria continues ” There are very few social problems that are made better by adding more people.”

This seems like common sense to me. But if immigration isn’t the answer, and private accounts didn’t get through due to suspicion and other issues, what is the answer?

What it Means to Test Social Security

Its basic math. You really can’t spend more than you make. Or you can, but you’ll have to issue bonds, t-bills, and perhaps raise taxes in order to do so. But for social security, the other option of reducing benefits is more likely.

Means testing is the fancy term for reducing benefits. By creating some irs-style grid or set of rules, the government could cut off the benefit of social security in some standardized way. It is likely that this could happen for people who are now in their 20s, 30s.

Of course, means testing is not without its issues either. “Varmit77″ writes the following comment, “If, some day, I have to relinquish a portion of social security to compensate for the shortfall that the “buy now-pay later” crowd puts themselves in when I choose to due without today for a better tomorrow, then I will not be happy…”

This sentiment is echoed by Bob in a later comment: “Unfortunately, I think Ben Stein may be correct. In his book Yes, You Can Still Retire Comfortably, he made the following dire prediction:

‘Those who have saved will be made to pay for those who haven’t, which means you need to save even more.’”

What to Do?
Here’s what you can do next:

Social Security statements are generally issued yearly. Make sure your payments into the system are properly recorded when you get your statement.

Make sure you are monitoring the amount that Social Security projects you will have if Social Security remains insolvent. And don’t plan on cost of living increases or any other increases from that amount as you get older. In fact, it may get worse.

Therefore you should be monitoring your retirement situation carefully based on age and be well aware of your financial situation with and without social security income. And the younger you are, the more suspicious you should be about the real benefits you will receive during your golden years.