More Young People May Enjoy Secure Retirements

NEW YORK (TheStreet) -- According to a variety of polls, many young people are glum about their retirement prospects. The pessimists fear their savings will be inadequate to cover living costs. Some members of the younger generation worry that Social Security will disappear.

In fact, the outlook may not be so bleak. In recent years, more people have begun saving. After facing pressure during the financial crisis, the Social Security program has rebounded and remains on solid footing.

The improvement in savings patterns is particularly noteworthy. According to a survey by TD Ameritrade, young people are proving to be better savers than their parents. While 46% of people aged 48 to 66 have regular savings plans, the figure is nearly 60% for those aged 23 to 47.

The gap can be traced to the different experiences of the generations. Many of the older group graduated high school in the 1960s, a time when jobs were plentiful and many workers could anticipate steady retirement income from traditional pensions. During that era, the need to save may have seemed less urgent. In contrast, young people who came of age in the past decade faced high unemployment rates and dwindling pensions.

"These days the media is saturated with news about economic concerns," says Carrie Braxdale, managing director of investor services for TD Ameritrade. "Young people are listening to the news and taking action."

The increased savings rate could be partly connected to fears about Social Security. According to the TD Ameritrade survey, a significant number of young people figure that Social Security will be diminished or gone soon. About 60% of the older generation agree, saying that young people will not be able to count on full Social Security benefits. But these concerns are unfounded.

According to the 2012 report of the Social Security Trustees, the program faced stresses during the financial crisis and emerged in sound shape. During the recession, tax collection slipped and more people claimed Social Security at younger ages. All that took a toll.

In 2008, the actuaries projected the main Social Security trust fund would not be exhausted until 2042. By this year, the day of reckoning had advanced to 2035.

The deteriorating outlook may sound ominous, but the picture is brightening as tax revenues rebound and fewer people are applying for early benefits. As the economy recovers, the slide in the trust fund is being reversed. Congress still has plenty of time to avoid shortfalls that could occur decades down the road.

"Social Security has been around for 77 years," says Virginia Reno, vice president of the National Academy of Social Insurance, a nonpartisan think tank. "Policy makers have always dealt with funding problems in the past, and it is inconceivable that they will allow benefits to drop abruptly."

To understand why Social Security is rock solid, consider that the system is supported by payroll taxes. Workers pay 6.2% of their earnings and employers put in a similar amount. The money is used to cover checks that are sent to retirees and people on Social Security disability plans. Excess cash is invested in Treasury bonds.

Social Security collects interest from the bonds in the trust fund and uses that to cover checks. When taxes and income don't cover outgoing payments, the program must sell Treasury bonds to raise cash. Since 1935, the program has collected $15.5 trillion and spent $12.8 trillion. The current balance is $2.7 trillion. That figure is supposed to grow to $3.1 trillion in 2020.

After that, Social Security will be forced to spend the reserves until they are exhausted. Some observers have argued that the use of Treasury bonds amounts to a shell game. But that is unfair. Treasuries have long been considered one of the safest investments in the world. That's why many foreign governments and private pensions hold the U.S. securities.

If Congress takes no action by 2035, Social Security will still be able to pay out more than 75% of full benefits. But it seems unlikely that Washington will sit back and let a popular program languish.

In 1983, Congress avoided a shortfall by making a series of changes, including an increase in the retirement age. In the coming decades, the program could be fully protected by increasing taxes a bit or making small cuts in benefits.

Odds are very good that Congress will take the necessary steps to protect the safety net that has proved to be one of Washington's greatest successes.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.

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