Social Security in the 21st Century

Few government programs have been tossed around the political football field more than social security and the “health” of the benefit. Most will agree that this long-time benefit, founded in 1935 during the dark days of the Great Depresson, is underfunded. The key questions to ask are 1.  what should legislators do about this problem, and 2. what should you do in your comprehensive financial plan to account for this uncertainty?

Applying for Social Security at the SSA Website

The first question above, with the problem clearly outlined in the annual social security statement (read the front page of your annual benefit statement sometime), is certainly not something we can address in this medium. Bottom line, it is likely our friends in Washington will come up with some “genius” solution to that problem. Therefore, since we can not solve that here and now (you and I are just lil folk right?), let’s focus on question 2.

As a Retirement Income Advisor (as opposed to putting a plan together to GROW assets), it is important to not only plan and project retirement income sources and see how they fit into a comprehensive financial plan, but it is also important to explore all the risks faced by a client’s income plan and see if these risks can be eliminated, mitigated, hedged or dealt with (perhaps if they are small).

The risk of social security going bankrupt per se is unlikely in my opinion. Before that would happen, we would likely get  either tremendous money printing by the Federal Reserve in some coordinated action with the US Treasury Department, a reduction in benefits for younger people in the guise of extending the Normal Retirement Age (NRA), decreasing COLA adjustments (or eliminating them?), or a cut in benefit amounts for certain higher income earners. Certainly taxes on higher income earners would increase to fund any shortfall.

Hence, we can plan for social security nominally for those close to or past the age that they are eligible for benefits. A more insidious risk, interesting, brought on in part by money printing by the Fed, is consumer price increases (consumer price inflation). As I write this in 2010, most food/agriculture commodities are up tremendously this year – and increases in the cost of foodstuffs acutely strikes lower income people. In a period of dollar devaluation, most goods will rise in cost to to Americans as it will take more dollars to buy goods. Therefore, a big risk faced by retirees is any though of relying mostly on social security to retire.

For retirees without an additional solid pension and without a decent amount of liquid assets (stocks, bonds, CD’s etc), and no home equity to tap (either through sale or reverse mortgage), it is likely they will have to continue to work in retirement. I hate to bring the bad news but I’m not one to blow smoke you know where. On the bright side however, having the cushion of social security may give you the freedom to try a new career or work part time at something you truly enjoy.

For more background on the history of the Social Security program, check out the Wikipedia page or go straight to the source, the Social Security Administration’s home page. Also explore these other pages on my site:

Social Security Survivor Benefits

Disability

Normal Retirement Age

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