A pension system is really a very simple concept. Workers give the system a part of their salaries. The total of that money gets invested. Then, when they retire, they get a portion of the money that was invested, for life. New workers keep funding the investment with fresh resources.
For that system to work, two main things must happen: First, the money must be invested wisely and generate compound interest. Second, you need fresh income from new generations contributing to the fund.
In 1954, you had 16 workers contributing to the fund for every one that retired. Today, you have 3 workers contributing for every retiree. Today baby boomers are retiring at a rate of 10,000 per day and benefits paid exceed current taxes. The government must borrow to make up the difference – in addition to the normal government borrowing to support their deficit spending.
US government debt roughly doubled from $10 to $20 trillion from 2009-2016. Debt will continue to escalate unless there are radical changes in taxes and spending. Raising taxes and cutting spending is politically unpopular, creating class warfare, while politicians pander to their political base.
Young people today must understand what Social Security is, and is not. A portion of their salary will be taxed, with a government promise to pay them benefits for their lifetime once they retire. How much those benefits will be, when they can retire, and the correlation of benefits to their personal wealth is undetermined.
What should all workers do now?
1. Recognize Social Security for what it is and work around it. Social Security was designed to provide supplemental income for retirees based on their income. It’s now another typical government “entitlement program” redistributing the wealth of the nation. The working class may end up with something; however the benefits will have little correlation to your contributions.
2. Maximize your savings, particularly your 401(k). Workers cannot depend on Social Security to protect their lifestyle. The proposed changes are designed to punish savers; the wealthier you become the more your benefits will be reduced.
Workers will have to go head on into the incoming tide and move forward. Maximize your savings in 401(k) type accounts – particularly if you have some sort of employer matching. You have the benefit of reducing your current taxable income and accumulating wealth on a tax-deferred basis.
3. Invest your 401(k) wisely. Having your investment income tax deferred is a good benefit but only if you grow your wealth. Don’t just make contributions and ignore where it is invested. If you need professional help to guide you, it is money well spent.
4. Increase your inflation hedge. The most buying power a retiree will have will be their first monthly check. By design, the buying power of each additional monthly check will decrease. For the “wealthy” the process will be faster.
In addition to maxing out your 401(k), continue to regularly buy gold. Only Gold provides historical gold prices. On 1/1/77 the gold price was priced at $133.77/oz. On 12/31/81 the price rose to $400/oz. During the Carter years gold almost tripled in value, appreciating well ahead of the inflation rate.
Buy and accumulate well past your normal retirement age. Your social security check will not keep up with inflation. Eventually retirees will have to sell small amounts to make up the difference to pay the bills.
5. Think before deciding to defer benefits. The government offers higher benefits to those who defer taking them when they are eligible. Making the wrong decision could cost thousands of dollars.
The decision about when to draw benefits is different for each individual. Not only do you need to “run the numbers”, realize you are making a bet with the government on how long you will live. How much do you trust the government not to change things?