My 96-year-old uncle is truly angry about Social Security. I’m sure his blood pressure moved dangerously high this past weekend as he explained the “raw deal” he is getting from the Social Security program. You see, he was one of the so-called “notch generation” — beneficiaries born between 1917 and 1921, whose benefits were recalculated as a result of reforms instituted back in 1977.
The members of this “notch” group were the first to receive automatic cost-of-living adjustments to their benefits. As a result of high inflation rates in the late 70s, it became apparent that their monthly payments would quickly escalate to more than 100 percent of pre-retirement earnings. So his cohorts, and all subsequent beneficiaries, had their benefits calculated more conservatively.
I surely don’t begrudge those Social Security benefits to my uncle and his younger brother (my father, age 93). They worked hard all their lives, the WWII generation, to win the war and build the America we enjoy today. Delightfully, they have lived long enough to reap a great benefit from the Social Security program. But despite the “notch adjustment,” they are reaping the best benefits any generation will receive from the Social Security system.
Running Out of Money?
It’s not being a fear-monger to state the obvious: The “Trust Fund” will run out of money in our lifetime. In fact, each year the Trustees of the Social Security and Medicare trust funds report on the current and projected financial status of the two programs. The projections are gloomy.
The 2014 report projected that the Disability Fund, a fast-growing benefit of the Social Security fund, will be depleted in late 2016 — two years from now! And the main Social Security “old age and survivors fund” will be depleted by 2033 — less than 20 years from now!
Either taxes will have to go up to make the promised payments (with an impact on the nation’s growth) or benefits will have to be cut for all, or cut based on other income. If my father and uncle live to see that moment, their anger — and the anger of the retiring baby boomers — will be palpable.
Yet according to the Trustees’ 2014 report, Social Security and Medicare together accounted for 41 percent of all Federal expenditures in fiscal year 2013. And that number will grow as our population ages. The crisis is upon us.
A Serious Safety Net
There is little room for adjustment in current benefits. For one third of today’s seniors, Social Security represents substantially all of their income. For two-thirds, it represents half of their income. And the average Social Security check paid out in 2014 was only $1295. (That amount is larger for many recent retirees, but reflects an average of all retirees.)
A new Census Bureau report shows that if the census were to exclude Social Security benefits from income, the poverty rate for American seniors would jump from 14.6 percent to 52.6 percent — roughly 23.4 million people. The nation’s overall poverty rate (based on this alternative measure) would rise to 24.1 percent from 15.5 percent.
The numbers are unthinkable. And it will be even worse for the next generations — if they continue to rely on Social Security. Perhaps it will take a crisis of poverty or a major cut in benefits or major tax increases for today’s younger generations to recognize how important it is to save outside the Social Security program for their old age — a period that will be stretched even further as longevity improves.
It was only a few generations ago that the average life expectancy at age 65 was just another four years. Today’s 65-year-olds can expect to live nearly 20 years longer. They will “use up” what’s left of the Social Security trust fund.
And tomorrow’s generations of retirees will feel the true impact of the crisis. When they figure out that their current paycheck deductions are going straight to help today’s retirees, we set the stage for generation warfare.
The message is clear: Save at least as much in your own retirement plan as is taken from your paycheck in payroll taxes. In 2014, an employee making $115,000 had $8835 taken out for Social Security, and an equal amount was paid in by his or her employer.
Here’s a suggestion: Have the deduction for your 40l(k) or IRA made automatically — before you see the money and spend it. If your company matches your contribution, then you “only” need to set aside about $4400 per year — or $85 per weekly paycheck — to match the amount Social Security takes out of your paycheck.
And despite the ups and downs of the stock market, if you’re under age 55, you have a much better chance of benefiting from your own retirement savings than you do from Social Security. That’s the Savage Truth.
Terry Savage is a registered investment adviser and is on the board of the Chicago Mercantile Exchange. She appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast, and can be reached at www.terrysavage.com. She is the author of the new book, “The New Savage
Number: How Much Money Do You Really Need to Retire?”