Retirement Myths You Can Ignore
If you believe the following, honk. 1) Social Security won’t be there when I retire. 2) 1 can’t retire on less than $1 million (or $2 million-fill in scary large number).
The noise outside my window is deafening. Among working people, those two statements now pass as gospel. There’s just one little problem: Both are wrong.
You read everywhere that the Social Security program is going broke, partly because the government has borrowed from Social Security’s trust fund and spent it on other things. This fear is stirred up by people who want to dump this successful safety net.
The Social Security trust fund, however, is doing fine. It’s huge — some $566 billion at the end of last year — and still growing. The money pours in from payroll taxes not currently needed to pay benefits. That cash is safely invested in special U.S. Treasury bonds; in 1996, they earned an average of 7.6 percent. Not until around 2019 will Social Security have to start tapping the trust fund to meet its obligations.
When that day comes, Social Security will start redeeming the bonds it owns. Those securities are good. The U.S. Treasury will not default. You may not realize it, but the Medicare program is currently living off its trust fund. No doubts have been raised about whether those particular treasuries will be paid.
When Social Security starts redeeming Treasury securities 22 years from now, the government will have to cut spending, raise taxes, or borrow an equivalent amount in the open market. No one knows how this is going to work, so we worry about it.
Around 2029, Social Security’s trust fund will be exhausted. Even at that point, however, payroll-tax revenues would be enough to pay 75 percent of everyone’s benefit for the subsequent 75 years — meaning no “collapse.” We need a fix, however, so people can get paid in full.
The fix can be pretty easy. For example, the payroll tax could be raised by 1.1 percent for employers and employees. That would cost the average worker an estimated $283 a year, or around $23.50 a month, with a matching amount from his or her company.
If taxes were raised and the proceeds invested in stocks rather than Treasury bonds, the trust fund would probably earn a higher long-term return, increasing the cash available to pay benefits. (In January of this year, a federal advisory panel suggested investing some of your Social Security money in stocks, though the members disagreed on how. But no action is expected for several years.)
Future tax hikes could be smaller if the age for receiving full benefits were raised at a faster pace (right now, it’s scheduled to rise to 67 from the current 65 in a series of small, uneven steps between 2003 and 2027).
Social Security keeps almost 40 percent of the elderly out of poverty, and saves tens of thousands from having to live with their adult children. It’s also a major source of income for widows, orphans, and the disabled. Small give-ups seem a modest price to pay for saving a system that does so much.
You’ll hear radical proposals to kill Social Security and substitute private investment programs. These other plans involve higher taxes, while giving you fewer retirement-income guarantees. They’d be good for savvy (or lucky) investors, who would get more for their money than Social Security pays. But what about people who don’t know a stock from a Ritz cracker? They might lose their money and wind up poor — the way older people were before Social Security began.
Older people today retired, comfortably, with less money than the Baby Boomers are going to have! Here’s the surprising news:
* Boomers, on average, have substantially higher real incomes than their parents did, according to a 1993 study by the Congressional Budget Office. So there’s money to save. Household wealth, such as home equity, is higher too.
* A large percentage of women are now in the labor force, earning their own pensions and building their own 401(k)s. For working couples, two jobs mean two retirement checks instead of one. Older single women will face less poverty than they do today.
* Back in 1950, only 25 percent of the workforce had an employer-sponsored pension plan. Now, it’s 47 percent.
* Today’s most common workplace plans — 401(k)s and 403(b)s — require you to contribute money of your own (sometimes with a company match). The problem is that some Boomers aren’t contributing enough. Whatever you do save, however, can be moved from job to job. Workers who leave traditional plans after just a few years get very little out of them.
* Two thirds of current workers say they’ll probably work (part-time) after they officially retire, says Dallas Salisbury, president of the Employee Benefit Research institute in Washington, DC, Obviously, the longer you work, the more money you’ll have.
But bear in mind: Some Boomers may have trouble maintaining their current standard of living after retirement. And though I believe that corporate downsizing has peaked, some Boomers also may be bounced from their jobs (and full benefits) earlier than they expected.
HOW MUCH DO I NEED?
In specific dollar terms, everyone’s retirement needs are different. Your own retirement will depend not only on Social Security, but also on pension payments, private savings, and any money you may inherit. Your health, longevity, and how long you work must also be factored in.