Last week I was invited to Washington D.C. to participate in an elite panel on the future of retirement savings, a discussion sponsored by the Aspen Institute. One highly respected expert started talking about investments and savings, noting that along with Social Security, they were the basis of boomer retirement income.
I could barely contain my reaction as I waved my hand to comment:
"If you believe in the Social Security 'Trust Fund,' you must also believe in the tooth fairy!" I said.
There was stunned silence. I suggested that if we were to come up with solutions, we'd have to start from the truth.
And the truth is, this recession has brought the Social Security crisis even closer to the brink. The recent rise in unemployment translates into a sharp drop in payroll "contributions." The problem of the future is now in the present.
Since the late 1980s, the government budget has been combining the "accounting surplus" in the so-called Social Security "trust fund" with the continuing requirements of government spending.
Thus, this year's $1.8 trillion budget deficit, or whatever it turns out to be, is consuming almost every bit of that "surplus" that was supposed to be accumulating to pay baby boomers' retirement benefits!
Open that "shoebox in Maryland" (if you don't understand that expression, you are so young, you will get
from Social Security) and all you'll find are paper IOUs from the federal government.
According to the Congressional Budget Office, the $659 billion in benefits that Social Security will pay out this 2009 fiscal year will exceed payroll taxes collected ($653 billion) for the first time since 1984, when that huge Social Security tax increase was enacted to "fix" Social Security for the boomer generation.
A year ago, the CBO projected there would be $703 billion in Social Security surpluses from 2009 to 2018. Recently, they have revised those estimates downward to be only $83 billion -- a pretty thin cushion in an era of trillions! And those assumptions include a return to economic growth next year, as well as no cost-of-living increases for recipients over the next three years.
In reality, it's likely that the projected SS surplus -- our benefits - will turn to a deficit that will deepen in the next few years.
As soon as Congress "fixes" the banking, housing, and automobile crises, they'll be forced to turn their attention to Social Security. Most likely, Social Security will become a "needs-based" payout to low-income, elderly recipients -- not a return of the "investments" you made with all those FICA deductions from your pay check every month over your working career.
Let's get this straight. For years, the actuarial surpluses in the Social Security "Trust Fund" have been used to offset the annual federal budget operating deficits. Now we've reached the point where the federal budget deficit will be nearly $2 trillion this year, enough to soak up just about all of the "trust fund."
It is now truly a "Trust Us" fund!
What can the government do? And what can you do?
Our government can "print" and borrow and tax. Those are its tools -- good as long as the rest of the world lets us get away with it.
Recently you heard the top Chinese finance minister opining that maybe instead of holding all those dollars (an estimated $1.5 trillion), perhaps China should hold another currency, or basket of currencies. That's not likely soon, but it is a warning shot.
And if foreigners (who have collected trillions of dollars during America's mass spending spree) are going to keep buying our Treasury IOUs (bills, notes, bonds), it's likely they'll demand higher interest rates to do so.
After all, they see us "printing" dollars -- actually creating more credit on the books of banks and other institutions -- with the click of a computer key.
So what can you do?
The answer is simple: Save more money. That's not a prescription to create a booming economy. But it does make sense on a financial basis.
You know how the airlines tell you to put on your oxygen mask before helping the person next to you? Well, if the government isn't doing the saving to deliver the promised Social Security benefits, it's going to be up to you to have the money you'll need to survive into old age.
That increased "saving" should come in several forms: Stocks have always outpaced inflation over the long run. "Chicken money" in short-term bank CDs or Treasury bills gives you liquidity, safety and the chance to capture rising rates if inflation returns. And gold is an insurance policy against extremes of inflation, an insurance policy you hope you'll never use, just as you hope not to use your homeowner's fire insurance.
Many of you are disillusioned after watching your stock market investments melt away in retirement accounts. Well, that's nothing compared to the meltdown of the submerged iceberg that represents Social Security.
If we're going to come up with solutions that work, we have to start from an honest assessment of the problem. And that's The Savage Truth!
Terry Savage is an expert on personal finance and also appears as a commentator on national television on issues related to investing and the financial markets. Savage's personal finance column in the Chicago Sun-Times is nationally syndicated. She was the first woman trader on the Chicago Board Options Exchange and is a registered investment adviser for stocks and futures. Savage currently serves as a director of the Chicago Mercantile Exchange Corp.