Don’t Depend on the Government in Retirement: The American Social Safety Net Has Holes

In planning retirement, Americans should be skeptical of the retirement promises of pols, who come and go.

That’s because your parents’ dependable Social Security and company pensions no longer exist. This worries many workers who expect Social Security to fund a significant part of their retirement income.

Social Security Gets Long in the Tooth

As Social Security recently turned 83—it was signed into law by President Franklin Delano Roosevelt in 1935—many baby boomers are fearful of more cuts and many millennials were convinced that they won’t collect a cent.

Indeed, “80 percent of millennial workers say they’re worried Social Security won’t be there for them,” according to a recent study by the Transamerica Center for Retirement.

They are worried that Social Security trust retirement funds will run out of money by the time they start collecting in twenty-five or thirty years.

That means Millennials, those born around the turn of the century, “face unique concerns for saving for retirement,” says Mark Henry, an investment advisor in Charlotte, North Carolina.

While most respondents in the Transamerica Center study, “A Compendium of Findings about American Workers,” expressed concern about Social Security, the yearly poll also found something odd.

I Will Depend on It, But….

“Most workers are concerned about Social Security, but they are also counting on Social Security as a meaningful source of income in retirement,” according to the study.

But at current funding levels, the system’s trust fund that pays people in old age and which once ran huge surpluses, will deplete its reserves. It will only pay part of its old age and disability fund obligations beginning in some 20 years, according to recent Social Security numbers.

“Today’s report,” Social Security trustees recently wrote, “shows that, as a whole, Social Security is fully funded until 2034, and after that it is about three-quarters financed.” The trustees also wrote that the Social Security disability insurance trust fund “is projected to become depleted sooner.”

Part of the problem, Social Security officials say, is that more people are projected to collect for longer periods and fewer people will pay into the system. This is a trend expected to continue over the next 20 years. (Note to El Donaldo: America needs more legal immigrants to come here and pay our payroll taxes that support Social Security.)

By the way, these taxes are incredibly regressive. They have been raised many times. They hurt job creation because they are high. Counting both the Medicare and Social Security “contribution” —an Orwellian term used by our Pontiac Poloniuses. There’s nothing contributory going on here. It is a tax plain and simple. Try not paying it, or any other tax used to fund our overgrown welfare/warfare state, and you’ll end up in the hoosegow—the taxes now come to 15.30 percent. Half is “contributed” by you. The other half by your employer, except, of course, if you are a freelancer. Then you have pay the whole tax yourself. Nevertheless, the system, despite all the money flowing in from overtaxed Americans, has many problems.

What happened? Why is America’s flagship social welfare program again facing long term problems?

Social Security: A Recent History

Social Security, in the 1960s to the 1980s, ran huge surpluses. A few things consistently put it in the black: The population was growing at a much faster rate than today, with lots of new workers coming into the economy. Politicians wanted to increase benefits, especially just before the voters went to the polls, so tax rates to pay for Social Security were often raised, but in such a way to do the minimum damage to politicians seeking re-election.

The realpolitik of our ruling class in the 1970s and 1980s quietly believed that it was easier to hike taxes on people in their 20s—young people like me and my contemporaries who looked at our pay stubs and couldn’t understand why one tax was so large—who didn’t vote as frequently as the elderly.

The latter were much more likely to organize, demanding the government provide them with more and more benefits. This is one of the classic problems of the modern giant welfare state, where relatively small, well organized, groups impose their will on the rest of us. Many of the latter are apolitical people, too busy working to support themselves. They have little time to join political pressure groups that want the rest of society funding them.

Despite periodic Social Security crises in the 1970s and the 1980s, the solution—which was actually a Band-Aid and not a long-term answer—of higher taxes, along with quiet cuts, seemed to work. The system accumulated huge surpluses. In the short term, everything seemed fine, but it wasn’t.

Indeed, short-term success would carry the seeds of Social Security failure. Pols noticed these huge surpluses and started spending them on other things; things that the Social Security money were never authorized to pay for, but that didn’t stop our rulers. They used the surpluses to make the deficits seem smaller than they were.

Social Security surplus money should have been put aside for the time when fewer workers would be entering the economy and more people would be living longer and collecting more Social Security. But the surpluses weren’t saved. It was spent by both Republican and Democratic governments that weren’t thinking of the long term. They were thinking about the next election and the next generation could be damned. Today, we’re the next generation.

That is how we got to the mess we are in now. This is a time when the Social Security needs help. I would say it needs privatization; that these assets need to be taken away from dishonest, short-term thinking, politicos who play around with our money unless there are legal prohibitions. And even then, they often look for legal loopholes because geld is the mother’s milk of the political class and the average pol relishes spending, spending and then spending some more.

However, today just about everyone can agree there is a Social Security problem. Even the people running the program say that something, over the next few decades, needs to be done. Indeed, the problems are affecting how people plan for retirement.

Do Something

Social Security reform, says Catherine Collinson, CEO and president of the Transamerica Institute and its Center for Retirement Studies, “is needed to mitigate Social Security’s funding shortfalls, but policy makers have made little progress in identifying and implementing specific changes. Workers need clarity and direction so they can plan accordingly.”

Amen, sister!

A problem for Millennials, unlike previous generations, advisers say, is that any cuts to Social Security would hurt them more than previous generations. That’s because they tend to save less and will likely live longer, advisers say. Professional advisors, men and women who design retirement plans, are watching as the problem continues to worsen.

“I look at the projected Social Security payment estimates for my clients and I assume about 15 percent less in drawing up retirement plans,” says Charles Hughes, a certified financial planner in Bay Shore, New York.

Compounding the problem for Millennials is they are unlikely to have the same retirement resources as their parents and grandparents.

“Millennials face unique concerns for saving for retirement,” Henry notes. “Previous generations could rely on company pension plans, which are declining in number.”

More Cuts?

It is unlikely that Social Security will go broke, Henry says, but payments to Millennials will probably be effectively cut as they already have to Baby Boomers. He notes Social Security payments were once not taxed. But, since the 1980s most Social Security recipients, unless poor, pay taxes on payments.

Gregory Bresiger and Social Security

(A personal aside: Please think about the sentence above the subhead for a moment. You will pay into a program for maybe fifty years or more—in my case, I had a job as a messenger in high school and starting paying Social Security. Today, thanks to significant private savings, I don’t expect to collect Social Security until age 70, when you can finally start collecting and get the maximum payment.

Then, you will pay and pay more unless you are very poor, you pay taxes on the payments. Does that make sense? Does that not sound like double taxation to you? Social Security’s supporters through the years have often tried to depict it as a kind of insurance, which it assuredly is not. Let me cite an example: A person purchases an annuity contract from an insurance company. He or she pays all the premiums. Now the insurance company is obligated to pay the contract holder for the rest of his or her life. Legally, it cannot go back and say, “oh, you have to pay more premiums.” The insurance company has a legal obligation to pay the contract holder, the owner of the annuity. Unfortunately, under Social Security, the government is under no legal obligation to pay. This last part has, unfortunately, been affirmed by the United States Supreme Court. However, politically, barring some incredible depression, it would be disaster for the government to stop paying Social Security. However, it can, and already has, cheapened or reduced benefits of the programs. Please remember this when you are planning retirement and think that Social Security will solve all your problems).

What’s to Be Done?

Advisor Henry speculates that the Social Security retirement age will be pushed back. “If the system is in trouble, will they say you can only get full payments by waiting to age 75?”

Assuming the worst, what should Millennials do?

“Start saving on a regular basis as soon as you can. It doesn’t have to be a lot at first, but do it every pay period. Be a tortoise. The tortoise is the one that wins,” Henry says.

With considerable money in private investments,” Henry adds, “anything you get from Social Security will be a bonus.”

Certainly, this is good advice. And the whole purpose of GregoryBresiger.com is to help our wonderful readers achieve financial independence so they are no longer dependent on any government left or right.

However, what about this ramshackle Social Security program? Can it be reformed? I believe piecemeal reform, which has been tried several times over the past forty years, has and will fail if tried again. Radical reform is, I believe, the only answer. And it must be based on a principle of justice; one that recognizes that tens of millions of Americans had been forced into a program that is a mess; that these Americans, if they had just obtained an average rate of return in the stock and bond markets—stocks on average get nine percent a year over the long term. Bonds about three to four percent—they would now be in much better shape than if Social Security was a significant part of their retirement plan. More on this anon.

GregoryBresiger.com will have some suggestions in our next segment.