Where Social Security Went Wrong and What You Can Do to Make Up for It
You’ve probably heard speculation that Social Security benefits are going to run out sometime in the near future. This is rightfully alarming, even to those who don’t rely fully on Social Security to fund their retirement. Most of us have been paying into Social Security since we worked our very first jobs. And we’ve been led to believe that we would receive benefits for those payments when we reach retirement age.
The loss of those promised benefits would be inconvenient at best, and disastrous at worst. Here’s the good news: the government knows that the loss of Social Security benefits would likely result in riots on both sides of the political spectrum, so they’ll do whatever they can to prevent that from happening.
But here’s the bad news: you may not particularly like the solutions the government comes up with.
Therefore, it’s in your best interest to plan ahead and set yourself up for a successful retirement that doesn’t depend on receiving robust Social Security benefits.
So what happened? Why can we no longer depend on Social Security to provide hardworking Americans with a comfortable retirement?
To fully understand, we need to go back to the beginning.
The Origins of the Social Security Program
The Social Security program was born as a result of the Great Depression when millions of American families struggled to find work, put food on the table, and provide for themselves. Unfortunately, the vulnerable elderly population was hit especially hard by the Depression.
After several previous failed attempts to provide elderly assistance and general welfare social insurance programs, President Roosevelt signed the Social Security Act into law in 1935. The Social Security Act would provide a government pension to retirees age 65 and older based on contributions they had paid into the program during their working years. (The program also provided assistance to other Americans experiencing financial hardship.)
For the next 30 to 40 years, the Social Security program enjoyed general expansion and growth. Amendments were made to the original Act to extend eligibility to dependents and survivors of retired workers, even if the dependents themselves had not paid into the program. For all intents and purposes, Social Security was doing what it was meant to do.
What Happened to Social Security?
By the 1970s, however, the cracks were beginning to show. The actuaries who had determined how to fund and maintain the Social Security Trust Funds (which held the revenues from Social Security taxes and invested them for growth) naturally based their calculations on assumptions that made sense in the 1930s, including:
The average American lifespan at that time, which was 62 years
The number of participants would not exceed 1/5 of the total U.S. population (this was the demographic age makeup of the elderly at the time)
The assumption that two working salaries would pay into the program, but only one retiree would draw down from it (due to shorter life expectancy)
Today, of course, those actuarial assumptions are obsolete. The average life expectancy for Americans has increased to 77.8, an increase of nearly 20 years. Courtesy of the strides we’ve made in healthcare, retirees are now living for about 30 years in retirement rather than 10. Unfortunately, it’s not easy for the government – or individuals, for that matter – to finance a 30-year retirement from a 40-year career.
The baby boomer generation has also significantly increased the number of retirees relative to the total population of the United States. According to Barbara Waxman, author of The Middlescence Manifesto, roughly 1/3 of the population is now over the age of 50, a considerable increase from 1/5. With fewer young workers funding Social Security, there is even more strain on the government to continue providing benefits payments to a larger population of retirees.
Furthermore, it’s no longer very common for only one spouse to receive Social Security benefits in retirement. In fact, even if one spouse did not work, they are entitled to a portion of their spouse’s benefits in addition to the regular benefit their spouse receives.
And finally, the Social Security Trust Funds are restricted to conservative investments such as government CDs, government bonds, treasuries, and the like. Therefore, the small returns of these investments actually mean that only 0.8 workers are contributing to Social Security for every two retirees that are drawing down.
Obviously, the math does not work out in our favor. The combination of these factors means the future of Social Security is quite bleak, and the looming financial disaster for retirees is urgent.
What Is the Government Doing to Prevent Social Security from Running Out?
As stated above, it is in the government’s best interest to solve the Social Security problem.
But the options lawmakers are considering may still be objectionable or even detrimental to some retirees. One of the most likely options policymakers are reviewing is to raise the normal retirement age and the early eligibility age to encourage people to work longer. This would mean that pre-retirees must wait an additional number of years to claim their full benefits.
Another option being considered is to implement life expectancy indexing that would reduce monthly benefits payments for retirees across their lifetimes. Among other downsides, this option risks the well-being of economically vulnerable retirees. Policymakers are also examining how they might generate more funding for the Social Security program through tax increases.
Unsurprisingly, none of these options are particularly attractive.
What Can Retirees Do if Social Security Runs Out?
Proactive workers and pre-retirees who are monitoring the Social Security crisis can take steps to protect themselves and still pursue a secure, financially free retirement. But they need to be strategic.
Like Social Security, returns from traditional investment assets are no longer quite meeting the needs of individuals planning to retire (see our other blog post regarding the inadequacy of traditional IRA/401(k) investments to see why).
To generate the returns you need, it may be time to start thinking outside the box regarding your retirement investments. Assets such as real estate, private lending, or storage unit rentals provide positive cash flow and, typically, much higher returns (up to 10% or above if you’re a savvy, discerning investor). And with a self-directed IRA, you can use your retirement savings to make these types of investments tax-efficiently.
How Chicago Trust Administration Services Can Help
At Chicago Trust Administration Services, we specialize in third-party administration services of self-directed retirement plans so you can invest in the assets you know and want to capitalize on. To see how we can help, we invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com.
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*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.