Are you old enough to begin to care about your retirement income? Well, if you are of voting age, perhaps you are.
“What?” you say. “I need to start worrying about my financial situation at age 65 or 70, when I’m now only 21 years old?”
In a manner of speaking, you do, and that is the subject of this article.
Currently there are two retirement systems in America:
1. One for government employees
2. One for everyone else
By most measures, government employees are doing well. The government awards them with generous retirement funds, which it properly puts aside to be available for future use.
So what’s the problem?
The problem is that these lavish benefits are weighing on government debt at a time when government debt is in near-crisis mode. Moreover, there is an element of unfairness involved, because the bottom line is that someone must pay for these overly generous benefits.
That someone is you and I.
But the story doesn’t end there. Another major factor is the retirement system for the rest of us. For many that system is underpinned by social security and most citizens are well aware that social security is subject to criticism at several levels:
- The amount paid to retirees is generally insufficient for even a life lived sparingly
- The system currently spends more than it takes in
- Social security, like many other of major entitlement programs, is not on stable financial footing and is projected to grow increasingly worse (see chart below)
Some of the reasons for the increasing instability have received some, light media coverage, but that coverage is often watered down because of the topic’s complexity and contentiousness. Here are some key factors of which one should be aware:
- Demographics are working to undermine the system. People are living longer, yet the qualifying retirement age remains largely intact. On average, people are therefore drawing money out for more years
- The “baby boomer” bubble that has been working its way throughout America’s economy for multiple decades is now making its effect on the country’s retirement system as the first boomer cohort retires. As such, a larger percentage of the American population than has heretofore been the case is now withdrawing funds from government coffers
- Social security’s bookkeeping is not exactly as solid a system as someone regularly meeting their mortgage payments with the expectation that it will culminate in home ownership (Of course in the last three years, a sluggish economy has undermined even this situation for some).
- The three aforementioned factors combine to threaten the certainty of social security payments to future retirees
Now, some political voices claim that there is no danger and that the system is solvent. Others say the system is simply the federal equivalent of a giant “Ponzi scheme”. This difference in viewpoint is due to the somewhat obtuse role played by “Special Issue Bonds” or SIBs.
SIBs are an accounting method in which the government spends some of the real monies deposited by citizens into the social security system and replaces them with SIBs. SIBs are essentially IOU’s the federal government pledges to pay back to social security enrollees at retirement age, which are backed by the full faith and credit of the United States. However, these “payback” funds currently reside nowhere but in federal ledgers. Accordingly, the system only remains solvent when the funds that currently working Americans pay into social security equal or exceed the amount of money retirees are drawing from it. That circumstance is now changing due to the “boomer bubble”.
As aside, any system that requires a constant influx of new entrants to fund the income streams of older members certainly sounds like a “Ponzi scheme”.
Thus, demographics combined with other Federal budgeting issues calls into question the government’s ability to honor its retirement pledges to working citizens today. One can appreciate the situation more fully, when one realizes that to make good on its pledge, Congress must vote for tax increases, cuts in benefits, or use inflation to cheapen the value of funds paid out. All of these are distasteful to citizens, and therefore to politicians who must run for re-election. So the problem has been denied, disavowed and kicked down the road for many years. This whole circumstance is likely associated with the recent Standard & Poor’s modest downgrading of America’s debt rating.
In other words, in the past, monies paid out to retirees were readily replenished by incoming new workers, so the system seemed stable. But now and for several future decades, incoming workers will be insufficient to pay the bill for new retirees. So if you are 21 years old today (or 30 or 50), you should be concerned about taking your social security retirement income. Specifically, as American citizens, you should be urging your elected representatives to convert the system into a more stable structure.
Entitlement spending is only one of America’s many fiscal challenges. The country must budget wisely and responsibly to assure its continued leadership and competitiveness in innovative products and manufacturing, both of which new and equally ambitious nations are successfully challenging. America has no special claim to continued global leadership, beyond what its people earn by virtue of their education, ambition, work ethic and competence.
If you are interested in learning more about these issues, further detail about this article is available in a presentation here.