As we head into Labor Day weekend, there is encouraging news about one of the most important income sources working Americans rely on in their later years: Social Security.
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I understand your reaction; recently all we hear are doomsday reports of Social Securitys demise, its understandable that you might be tempted to write it off. Most people who arent already retired probably think, Why should I care about Social Security? Im never going to see any benefits. So, allow me to set the record straight with the help of the Center for Retirement Research at Boston College: according to director Alicia Munnell, putting Social Securitys finances on a healthy footing wouldnt take as much sacrifice as you probably think.
The first thing to understand is that Social Security is required to report annually what its financial status looks like over the next 75 years. Next, consider the laundry list of variables that have to be plugged into the equation, which include population growth, longevity, immigration rates, inflation, wage growth, birth rates, size of the working population. The health of the economy is also factored in because this directly affects the number of people who have jobs and, therefore, the amount of Social Security tax collected.
Since all of these factors are unknowns, the folks who dutifully crunch the numbers every year have to estimate what each will be over the next 75 years. Whats more, this has to be computed three ways, producing high cost, low cost and intermediate scenarios. The point is, reports about Social Securitys financial condition are based on educated guesses about events that will take place over the next seven decades. (You can bet that back in the 1990s no one was factoring in the Great Recession.)
To put this into more personal terms, what if your bank required you to project your income, expenses, debts, investment values, taxes and credit card balances for just the next 30 years before it would consider giving you a mortgage. Just how accurate do you think you could be?(1)
As I wrote last week, Social Security was on shaky financial ground 30 years ago and it had nothing to do with baby boomers retiring. As most people know, Social Security is a pay-as-you-go system in that taxes paid by current workers are used to pay the benefits of those retired. However, double-digit inflation and rising unemployment in the 1970s hit the system with a one-two punch: Inflation-adjustments meant that benefits paid to current retirees were rising; at the same time, fewer people in the workforce caused a drop in the amount of payroll taxes collected. Social Security was dangerously close to not collecting enough money to cover the checks it had to pay.
In 1983, in addition to addressing the short-term issue, the blue ribbon commission appointed by President Reagan pointed out that based on the intermediate 75-year projection, Social Security was running a long-term deficit of 1.8% of taxable payroll. In the early 1990s, this increased to 2.0%. Last June, Munnell, who holds the distinction of being the Peter F. Drucker professor in Management Sciences, calculated that over the next 75 years, Social Securitys long-run deficit is projected to equal 2.2% of covered payroll earnings.
If employees and employers each kicked in 1.1% more, we could solve Social Securitys financial problem for the next 75 years.(2)
Im guessing here, but I bet, most of us would probably be open to that. Share the pain; spread it out in small increments over decades and everyone gets the benefits theyve been promised.
Of course, this isnt the message were hearing from our so-called leaders in Washington.
Instead, we get frightening stories about trillions of dollars needed to shore up the system and hints that Social Security might not be there when we retire. Theres a lot of rhetoric, says Munnell. They make it seem more dire than it is. If it werent so sad, it would be laughable. [Social Securitys] financial shortfall would be so simple to fix--whether we make little tweaks (3) or do it all on the tax side for not that much.
The problem is that no politician dares to utter the T word, i.e. raise taxes. So, we postpone. And postpone. They dont explain why its better to fix [Social Security] sooner rather than later in terms of both fairness and the size of the tax increase needed. Until the problem is in Congress face, theres no incentive to act.
One never-mentioned consequence is how all of this negative rhetoric about Social Security affects the national psyche. Several polls show an increasing number of people of all ages say they are worried about being able to afford retirement and less confident they can rely on Social Security. The number one retirement plan of baby boomers is simply: keep working. Add to this the barrage of reports about our soaring federal deficit, the downgrading of Americas once pristine credit rating, the continued depression in the housing market, record swings in stock prices, threats of municipal bankruptcies, and, well, its enough to make you feel like were a nation of financial losers. The American Dream is gone. Poof!
According to Munnell, adding to public confusion about the financial state of Social Security is the fact that basically, all the publicity is focused on when the trust fund is gone. Thanks to continued high unemployment, this years Trustees Report moved this date up a year to 2036.
The problem is, many people think that when the Trust Fund runs out of money, so does Social Security. However, even when the Trust Fund is exhausted, collections coming in from those still in the workforce will cover roughly 75% of the benefits promised. Munnell is especially concerned about the negative view that younger workers have about the system. The idea that theyll get zero is just plain wrong!
Munnell passionately insists that fixing Social Security is simple! Its in everybodys interest to do it. Moreover, she asserts that taking the necessary steps to ensure the viability of this vital income support that affects all Americans would be a big psychological boost, something the country could use right now. It would make us feel we could control our fiscal destiny.
1. Just imagine how healthy the federal governments balance sheet would look if the Treasury had to make a 75 year projection!
2. According to Munnell, thanks to the seemingly permanent drop in this countrys birth rate, putting Social Security on a firm financial footing permanently would require both employers and employees each kicking in an additional 2% in payroll tax.
3. Munnell does not advocate a particular action, but others have suggested raising the age at which you can apply for early Social Security benefits and/or raising the age at which you can collected full benefits.
Ms. Buckner is a Retirement and Financial Planning Specialist at Franklin Templeton Investments. The views expressed in this article are only those of Ms. Buckner or the individual commentator identified therein, and are not necessarily the views of Franklin Templeton Investments, which has not reviewed, and is not responsible for, the content.
If you have a question for Gail Buckner and the Your $ Matters column, send them to: email@example.com, along with your name and phone number.
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