If you haven’t heard yet, Europe is going through a serious financial crisis. It’s centered around Greece, but everyone is struggling thanks to declining tax revenues and social programs that would make any tea-partier fall overboard. France has an overwhelmingly generous social security system, and on top of that you can currently retire at the age of 60. By comparison in the US you can’t retire until 67 and still receive full benefits (if born after 1959). Since social security pensions are payments for life, the earlier you can retire, the more money you can get. To save money, pension programs and the government alike have pushed back the retirement age to reduce the burden on the provider of funds. For social programs, the burden to support current retirees falls on current workers. France is having some issues with this and are considering raising their age to 63 from 60.
The US may have a higher retirement age, but our system is in shambles itself http://weakonomics.com/2010/03/15/social-security-cashing-in-ious/. There is a surplus in the Social Security trust fund built up from the Baby Boomers working, but that surplus is about to start getting drawn down. Statistics and predictions vary, but sometime in the 2040s the fund runs out of money and has to fund the retirees then directly from the taxes it takes in from workers at that time. In other words, at that time our grandchildren will start directly paying for our retirement. And there won’t be enough of them working fund us completely. We’ll have to take a cut in the expected payout. You won’t be getting as much as your parents get/got.
President W Bush, in all his failings, tried to reform the Social Security problem. But no one was listening, we were too obsessed with other issues during his presidency. That’s unfortunate because the best time to change the system is when the economy is doing well. Now the economy sucks, more and more people are relying on the government, and Social Security is still a mess.
The system is going to get changed, in some form or another. You need to be educated about the situation in order to make sure you are heard when the discussion goes from being a pressing issue to a critical one (sometime this decade). There are basically three ways to deal with Social Security: wind it down with some generation paying in but never getting anything back, raise taxes, or raise the retirement age. It’s political suicide do the first option, but that is ultimately the only way the program will end. In that respect, Social Security is very much the ponzi scheme critics claim it to be. So that means eventually the tax rate will have to go up and/or the retirement age will. I’m no tax expert but I think we currently pay a % tax up to a certain amount of income (it is much more complicated than this and I invite an expert to leave a comment). For argument’s sake let’s say it’s 10% up to $100,000 in income. Anything about that isn’t taxed. That will have to be the first thing to go. They’re going to start taxing every dollar of income. It’s Social Security, in social program involves high income earners paying in more than they’re getting out. That’s kind of the idea, it’s just never phrased that way.
Congress and the IRS in their infinite wisdom will of course do some kind of winding down tax rate from maybe $100k to $1M in income but whatever. They’ll also probably raise the tax rate on the middle class so that when they reduce rates in the higher brackets they can still get a good percentage of the income. But that increases income without reducing the payout burden, so they’ll have to raise the retirement age too. Not only does this reduce the benefits they’ll have to pay to individuals, it will also increase the number of people that pay into social security their entire lives only to die right before drawing on benefits. Sounds cruel, but the more people that do die right at retirement age, the more money exists for the rest of us. Don’t shoot the messenger.
All these reforms will have the net effect of increasing what you pay in and decreasing what you get out. But you have to factor in things like longer life expectancy. If you grandparents live to be 80, but you live to 100, that’s 20 years of payments you get that they didn’t. My advice to you is work as long as you physically can, save like mad, and just assume you’ll never get anything from the government. That way what little you do get will feel like a bonus.
Photo: Aric Riley
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SS should be a bonus. It was never meant to be a retirement plan. I’d like to see a gov’t plan to phase it out (it would take 4 or 5 decades) and force people to plan for themselves. There would have to be exceptions, of course. Some program would have to remain for dependent children who’ve lost parents. But we ordinary workers need to have our own plans.