The Social Security System has operated for over 80 years as a final backstop to prevent seniors from living out their last years in absolute poverty. While the system was never intended to be the sole source of retiree income, many seniors over the years have come to rely more and more heavily on Social Security in their twilight years. Given the problems facing the system today, that could be very problematic.
Many seniors have complained in recent years that Social Security income has hardly budged over the past decade. Low official inflation figures, the result of the low interest rate environment brought about by the Federal Reserve since the financial crisis, have meant that cost of living increases have been largely stagnant. But with rising prices for food, housing, and gas, many seniors reliant on Social Security have been getting pinched.
The problems with Social Security are numerous, and they will only get worse over the next few years. Seniors who are expecting to rely on Social Security for the bulk of their retirement income could find themselves in a bind unless they begin to take steps now to protect themselves.
Social Security Is Underfunded
The primary problem with Social Security is that the system is woefully underfunded. There are a number of reasons behind that, but one of the most serious is that Social Security doesn’t have enough income to pay out all the benefits that it has to pay. This is a problem that has occurred repeatedly throughout Social Security’s history, and is rearing its head once again.
Over the history of Social Security, the system has often taken in more money in Social Security taxes than it paid out in benefits. The excess revenues were rolled over into US government Treasury securities, and the funds used for other government spending. That was the origin of the Social Security trust fund. The interest on those Treasury securities in the trust fund was used to contribute further to pay Social Security benefits.
But today Social Security benefits paid have grown larger than the combined amount of Social Security taxes and the interest on the trust fund. That means that the trust fund securities have had to start being liquidated in order to pay Social Security benefits. By 2035 at the latest, the trust fund is expected to be completely depleted. And at that point, Social Security taxes are only expected to provide enough income to the system to pay about 80% of expected Social Security benefits.
If you’re expecting to rely on Social Security in retirement, are you prepared to deal with a 20% hit to your benefits? If not, you’ll need to ramp up your personal savings in order to deal with that potential income loss in the future.
Population Growth Is Overestimated
Another reason Social Security is underfunded is that the system has to project far into the future in order to predict Social Security outlays. Like many pension funds, the assumptions Social Security has made are overly optimistic on the growth side. Since Social Security has to make projections up to 75 years into the future, overly optimistic long-term projections can lead to short-term and medium-term financial difficulties.
Social Security relies on a constant stream of new workers entering the market, since current workers’ Social Security taxes pay for the Social Security benefits demanded by retirees. Social Security’s predictions for population growth have not only overestimated the future growth in population, they have consistently overestimated population growth over time. And that has resulted in overly optimistic predictions about future income from Social Security taxes.
Employment Is Overestimated
Not only have predictions about population growth been overestimated, but predictions about employment have been similarly overestimated. The labor participation rate has seen a significant decrease in recent years that shows no signs of abating, meaning that even if the population increases, the number of employed Americans won’t grow as quickly as it has in the past.
That means that Social Security tax revenues won’t grow as much as the system is predicting either. And with a growing population of retirees growing older and living longer, the amount of Social Security benefits being paid out will only continue to increase.
Retirees Will Be on Their Own
This growing trend of rising Social Security benefit payments plus lower Social Security taxes means that, without a long-term fix, Social Security recipients won’t be able to expect the full amount of benefits they otherwise would be entitled to. And with Congress largely oblivious to the problems facing Social Security and doing nothing to fix the problems with the system, the likelihood of a fix occurring anytime soon are slim.
Retirees need to be cognizant of the problems facing Social Security and need to take steps to secure their retirement without relying on Social Security. That means boosting their contributions to 401(k) or TSP accounts, setting up IRAs, or investing for retirement through brokerage accounts. And the more money they have invested in those accounts, the more they will need to protect those investments against loss.
Many investors found out the hard way in 2008 that what goes up must eventually come down. Stock markets lost over half their value during the financial crisis, destroying years of investment gains for millions of investors. Those investors have loved seeing the recovery since then, especially the bull market in stocks that has occurred since 2016, but they know that the next crash is just around the corner. When it occurs, they want to be prepared.
That’s why so many investors have made the move into gold, hoping to benefit from gold’s protective abilities. Gold’s price really took off during the financial crisis and continued to grow for years afterward. With gold already making great gains in 2019, the outlook for the next few years is similarly bullish. The greater the likelihood of a recession and stock market crash, the better gold will perform.
If you are concerned about your retirement, understand the need to build up and protect your retirement savings, and want to take steps to safeguard your investments, start learning about investing in gold today. With a gold IRA, you can even use existing retirement account assets to invest in gold while still enjoying the same tax advantages as a conventional IRA. But don’t delay, as every day brings us closer to the next stock market crash. Make sure your assets are protected before then so that you can ensure that your retirement savings remain safe and secure.