Will Social Security Be Around When I Retire?

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Every year, about three months before your birthday, the Social Security Administration mails you your annual statement. My wife Kristen received hers the other day, and I was reading the insert included with the report. The insert was titled "What Young People Should Know About Social Security", and one of the questions asked was:
 
Will Social Security still be around when I retire? 
 
Here's their answer:
Yes.  The Social Security taxes you now pay go into the Social Security Trust Funds, and are used to pay current beneficiaries. The Social Security Board of Trustees now estimates that based on current law, in 2037, the Trust Funds will be depleted. Because people are living longer and the birth rate is lower, the ratio of workers to beneficiaries is falling. Therefore, the taxes that are paid by workers will not be enough to pay the full benefit amount. Even if modifications to the program are not made, there would still be enough funds in 2037 to pay about $760 for every $1,000 in benefits scheduled.
 
I don't think this may come as news for you. If you spend more that you save, you will run out of money. I don't have an immediate solution on how to fix the Social Security Trust Fund, but as a Certified Financial Planner, I need make people aware of the importance of personal savings. My role is to help you have an understanding of what your future expenses will be, and make sure you are on track to save and invest the correct way to make sure that future income will be there to best meet your needs.
 
As you may know, people receiving Social Security checks are eligible to receive a raise every year, known as a COLA (cost of living adjustment). For 2010, there is no COLA, since year-over-year expenses were flat.  However, people receiving Social Security traditionally have higher medical expenses than younger people. Medical care and services increased in price by 3.8% for the year through November (source: Department of Labor, CPI Summary, 12/16/09). There might not be much we can do with regard to inflation, but you will have greater control of income and expenses through financial planning.  
 
Should Social Security be in good shape to make payments to our children and grandchildren, that would be great. But unless modifications are made to improve the program, let's not count on it. Encourage young people to save. Young people with long time horizons will benefit greatly from the power of compounding interest. Here's an example, let's consider a $1,000 gift is made to a grandchild. What's that worth in 30 years?
 
At 5% = $4,321
At 8% = $10,062
At 12% = $29,959
At 15% = $66,211
 
Sounds good, right? All we need is a fixed rate of 15% and we can be set for life! Now, where can I get a guaranteed 15% for 30 years? No place that I know of, and don't let anyone else promise you double-digit guaranteed returns either. No such thing.  I put these figures here to show you the best gift we can give young people, who may not have access to social security, is that of financial education. Even at a 8% rate, you money will be worth 10x more. At 12%, it will be worth 30x more. That's the power of compound interest.
 
Take control of your financial plan. Don't let your finances take control of you!

Jim Werner, CFP (R), Financial Advisor
Halliday Financial Group

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