Wobbly Third Leg - Social Security at Risk
A three legged stool is often used to describe retirement planning: private savings, pension benefits from employers and Social Security. The problem is that each leg is becoming increasingly wobbly. We already know that the national savings rate in the U.S. and elsewhere is anemic at best. Pension plans are either non-existent at countless companies or undergoing radical transformation in the form of rescinded benefits, transfer of risk to employees (via a defined contribution plan) or complete termination.
Making matters worse, Social Security trustees have just rung the alarm bell on what many thought was a safe bet. According to the recently issued trustees' report for 2006, "the fundamentals of the financial status of Social Security and Medicare remain problematic under the intermediate economic and demographic assumptions. Social Security's current annual surpluses of tax income over expenditures will soon begin to decline, and will be followed by deficits that begin to grow rapidly toward the end of the next decade as the baby-boom generation retires."
The trustees acknowledge that the program passes a "short-range test of financial adequacy" but "continues to fail our long-range test of close actuarial balance by a wide margin. Projected OASDI tax income will begin to fall short of outlays in 2017, and will be sufficient to finance only 74 percent of scheduled annual benefits in 2040, when the combined OASDI trust fund is projected to be exhausted."
How much worse can it get?
The year 2040 may seem an eternity away but not when you take into account the miracle of technology and its effect on longevity. Living longer is arguably a gift but what happens when people who live for another twenty to thirty years past retirement run out of money? (Check out a May 9, 2006 conference about aging and the impact on financial markets, sponsored by the North American Securities Administration Association.)
Far from trivial, people may simply not have enough money to get by. Working longer or exiting retirement to work again are possible solutions. In fact, some seniors find that they prefer to work. However, what if employers resist hiring older workers? What if some jobs require physical stamina that may not exist as one's body ages? According to a new survey released by the Metropolitan Life Insurance Company, working past sixty may be driven more by financial necessity than desire.
One thing is clear. Things have got to change. Otherwise, be prepared for a tumble as one or more of the stool legs break.
Note: OASDI stands for "Old-Age, Survivors, and Disability Insurance".
Retaining Social Security Benefits at current levels and formulas is not particularly expensive at slightly more than 1% increase int the contribution rate for covered pay a total of about 2.11% when you include employer contribution. I am much more concerned about the massive additional tax rates needed to bring medicare into funding reality.
Hi number cruncher - Are you sure all the fuzz around the social security in the US could be solved by raising taxes by only 1% of covered pay?!? That seems like an ok option - even on the political front, or maybe 1% is actually a lot?!? EXCLUDING the medicare for the time being...Other than that, I think life expectancy will be cut short if people dont have money at retirement... those without money will not afford the nice and most likely expensive new technology.. so the rpoblem is somewhat sorted! However, the richer will get to live richer and longer and inversely fo rthe poorer! Looks like teh gap between the poor and the rich is expanding once again - until the next revolution.