How secure is your retirement?

Maria Garriga at the New Haven Register has an article where Douglas Fore tells why the baby boomers are heading towards poverty in their retirement years. Of course its always good to have a single source when writing about such a complex issue, there can't be a difference of opinion on what to do or even how serious the problem is but that is beside the point.

Fore's basic premise is sound, we are heading towards a major crisis with Social Security when the baby boomers retire. When Social Security was started, it was a very squat pyramid. A very wide base (lots of people paying into it) and a short top (not many people taking money out of the system). That pyramid has been getting narrower over the last few decades (not as many people paying into the system and more taking money out) and after the boomers retire, the pyramid will become inverted. More money going out of the system then is going into it.

Social Security does not work like a bank account or a 401K plan, where the money each person pays in goes into an account and is waiting for them (even though that is how the SSA would like each person to think based on the benefits letter they mail out yearly). The system has always been a transfer payment plan. The current workers are paying the current retirees (so when you get your paycheck next time and see the money taken out for FICA, know its going to folks (like your parents) who are currently retired).

Fore is correct that within 20 years, either Social Security taxes will have to go up dramatically (like 40% tax rate with employer matching) or benefits will have to be cut dramatically (like to one third of current payments for the system to stay solvent.

Fore is also correct that workers under 45 should not be counting on receiving any Social Security and should be maximizing 401K contributions, IRA and just plain old putting money into savings, which as a country America does not do.

A few comments Fore makes are just wrong and detract from the rest of the story which is not bad. He says the factors contributing to the retirement crisis include tax cuts and increased government defense spending. These two items are just wrong. Social Security is not funded out of general revenue so tax cuts other then payroll taxes does not effect the SSA Trust Fund. Likewise, government spending does not use the SSA Trust Fund money so defense or non-defense spending is irrelevant.

Of course if the budget deficit was smaller, the government borrowing would be smaller from the Trust Fund and from the public, but that does not effect there not being enough money in the system to pay the future retirees claims on the system.

Overall, its a good article and is a reminder we are responsible for our own retirement so maybe the high definition TV can be put on hold so more money can be put in to your retirement plan. That is always a good idea.