Will it still be around when you retire?
Many individuals are beginning to wonder if Social Security will even be around when they retire. Here at Annuities HQ we often hear from clients about their concerns on this subject – so we will be presenting a series of articles on Social Security. Today we offer some commentary and links to a few particularly good articles.
Here’s a snippet from the people at the FPA (Financial Planning Association):
“If you’ve read a newspaper or visited a news Web site in the past few years, you’ve heard that Social Security is becoming insolvent. Unless a change is made, in 2037, Social Security won’t have enough money to continue to pay the same kind of benefits people are getting today.”¹
What Caused the Problem?
The original purpose of Social Security was to offer a baseline insurance policy for retirees. It would be a “pay as you go” plan with an employed work force providing the money for the Social Security fund to pay benefits for those in retirement.
But along the way demographics changed — life expectancy increased and the ratio of workers to those in retirement started to drop. This shift meant that the money coming in would soon not be enough to support the money going out. Attempting to avert future problems, in 1983, a Social Security Trust Fund was created, with the intention to use excess payroll tax revenue to underwrite the shortfall in future Social Security needs. These funds were to be invested in a way which would enable the fund to grow and protect the system for 75 years.
Instead, a system was created where these additional funds were put into non-negotiable treasury bonds, the equivalent of an IOU from the government. The actual revenues were spent on general government expenses.²
Now before you panic, in actual fact it looks as though – for now at least- Social Security isn’t going to go broke (not just yet anyway). A report released by the Congressional Budget Office (CBO) revealed that the Social Security Trust should have sufficient funding through to 2038 – a bit of an increase, but not much really.
“There is another trust fund issue and it is the one related to the expected increase in the ratio of retirees to workers over the next couple of decades. This would presumably cause a net drain on the fund since payments to retirees might increase relative to tax revenues. This is actually the specific phenomenon to which many people are referring when they say that Social Security is going to go bankrupt. However, a) there is no guarantee this will occur since rising productivity could drive up wages sufficiently to compensate (although our trend of stagnating wages relative to profits is frustrating this) and b) even if that did occur, this hardly means that Social Security is kaput. Any shortfall can always be addressed in a very straightforward and supremely logical fashion: raise taxes or lower benefits (and it is exceedingly like that even if this occurs, we aren’t talking about anything drastic). It bears emphasizing, however, that such changes would still be a function of productivity and have absolutely, positively nothing to do with how much money we have or haven’t saved up. Funding, finances, money, taxes, etc. are part of the coordination mechanism, not the feasibility.”³ READ MORE….
So, can Social Security fail? The short answer is no, it cannot. As long as America has a workforce that is highly productive, earning wages and paying taxes, there will always be room for Social Security.
The Social Security system, as we stated earlier, is viable as is for another 24 years. However, new or increased taxes combined with lower benefits are very likely the scenario to be faced. Concerns about Social Security may be somewhat over-exaggerated, but that doesn’t mean you shouldn’t be concerned and adequately prepared.
Head over to our Advisor Directory and you’ll soon be speaking with an Annuities HQ Trusted Advisor – you can ask about your Annuity options – how to lessen your concerns about your retirement. There is little risk that Social Security will go away, but there is a very real risk that benefits may be reduced. Guaranteed income from a lifetime annuity (for example) can give you great peace of mind and financial stability on top of your social security.
¹. Financial Planning Association. “Issues Facing Social Security.” Financial Planning Association, 21 Feb. 2014. Web. 22 Feb 2014. <http://www.fpanet.org/ToolsResources/SocialSecurityPredictor/IssuesFacingSocialSecurity/>.
². Financial Planning Association. “Issues Facing Social Security.” Financial Planning Association, 21 Feb. 2014. Web. 22 Feb 2014. <http://www.fpanet.org/ToolsResources/SocialSecurityPredictor/IssuesFacingSocialSecurity/>.
³. Harvey, John T. “Why Social Security Can’t Go Bankrupt.” Forbes. Forbes Magazine, 07 Jan. 2013. Web. 25 Feb. 2014. <http://www.forbes.com/sites/johntharvey/2013/01/07/social-security-rerun/>.