If you’re in your 20s or 30s, you’ve probably said, “Social Security won’t be there for me.”
That will only happen if you let it happen. I submit that your generations will need Social Security even more than mine because of the massive decline in traditional pension coverage for nongovernment workers (from 35 percent down to 18 percent in the last 20 years). It’s in your best interest to ensure that Social Security is healthy.
The bottom line question is: How do you and others in your generation avoid living in poverty when you’re old? One widely accepted approach is to utilize 401k and IRA plans.
However, this approach isn’t working well: A recent Federal Reserve study found that the median household age 55 to 64 had an income of $55,000 and $100,000 in retirement accounts. That $100,000 would generate a retirement income of less than $500 per month for you and your spouse. Who can live on that? Yes, people should save more, but the reality is that it doesn’t happen.
Can the Social Security retirement program minimize senior poverty? Yes. Back in 1949 when Social Security paid very little, senior poverty rates were close to 70 percent. From 1950 to 1975, Social Security payments went up significantly. Several studies show that this increase drove senior poverty rate down into the teens. Currently, it’s about 9 percent.
Today’s Social Security pays a retired worker $1,267 per month on the average, about 132 percent of the federal poverty level. If you include a nonworking spouse, the benefit is about 147 percent of the poverty level.
Social Security becomes even more critical if you factor in inflation. If the next 20 years of inflation are as benign as the last 20, that $500 retirement income I mentioned would have the purchasing power of $315 after 20 years. In contrast, Social Security payments go up with inflation.
What if you’re an excellent saver who also manages to keep a traditional pension, save throughout the next 30 years and avoid financial catastrophe?
You don’t need Social Security, but it’s still nice to have Social Security income. The more you pay into the system, the more you get back. Having a large percentage of your generation living in poverty would have a major impact on your life. What would it be like seeing a bunch of old people (your peers) on the street? What does that do to the economy that you live in?
I think that I’ve established a big need. I’d like to give you some facts that you may not understand. The media and politicians frequently don’t understand the facts or deliberately ignore them.
1. Social Security payments do not use a single dollar of general tax money; rather, benefits are paid from the Social Security tax. In 2012, for the first time, the Social Security system needed to use interest from its bonds (see below) to fully pay benefits.
2. Social Security does not contribute to the federal deficit; it is a self-sustained program (unlike welfare, food stamps, Medicaid, the military, etc.). You don’t get benefits unless you pay into the system.
3. From 1984 through 2011, the Social Security tax was higher than necessary to pay immediate benefits. By law, this additional revenue was invested in treasury bonds. So instead of additional borrowing from the Chinese or others, the federal government borrowed from Social Security. The total value of that borrowed money currently stands at $2.7 trillion. The federal government can repay these bonds by selling new bonds to the Chinese and others without change to the federal deficit.
4. The next decades will see fewer people paying Social Security tax and more people drawing benefits. Without a change to the program, the current forecast is that Social Security will consume its savings up to 2033, when they will be exhausted. At that point, Social Security tax will still pay 77 percent of benefits using Social Security tax revenue.
5. In response to Social Security revenue shortfalls, politicians with courage made a number of changes in 1977 and 1983. These changes healed the system for many decades. It’s now time to make more changes so that your generation gets the full benefit of Social Security. You need to insist on it.
Besides insisting that our politicians treat the Social Security system properly, you 20- and 30-year-olds can have more kids and raise them well. They’ll form a large working population that will help pay for your Social Security.
Discussion about attacks on Social Security and how the system can be fixed are topics for another column.
Kent Treiber lives in Lake Wildwood.