By Kevin M
It’s become almost fashionable these days to talk about the impending bankruptcy of Social Security, as if its demise is all but a done deal. But is that even the case? And how should we plan for what ever we might expect to get from the system when our turn at retirement comes along?
Let me state at the outset that I’m not a blind optimist cheering on the “company line” about Social Security as if dark clouds weren’t looming on the horizon. The fiscal ship that is 21st Century America is not an enviable one and the bill will certainly come due either gradually (let’s hope) or suddenly, but either way Social Security is likely to be there in the future—in some form or fashion.
Why the “bankruptcy” of Social Security is unlikely
People speak almost casually of the bankruptcy of Social Security, as though the program exists in a vacuum where it can quietly implode without any collateral damage to the rest of the government or country. But what would happen if it did?
To believe that Social Security will disappear is to predict the collapse of the entire federal government. A Social Security bankruptcy would almost certainly be part of a much larger general bankruptcy by the US government. The same government that issues monthly checks to senior citizens also funds national defense, interest on the federal debt, various forms of welfare, transfers to the states, foreign relations and the administration of justice, among others. If it can’t afford to pay out Social Security, it won’t be able to cover all the other programs either, at which point it no longer exists as a practical matter.
Social disorder. Social Security is the largest of the entitlement programs and in a very real way it’s the bedrock of all of them. Much of government legitimacy rests on monthly checks to retirees and if that were stopped for any reason the trust the citizens place in the state would evaporate. The implications for general social order could hardly be measured, but we can fully expect that it won’t be pretty.
The affects on the already battered housing sector would be substantial. Part of the explosion in the number of households after the second world war can be directly traced to Social Security. With a monthly government check, a company pension and/or a stream of investment income, millions of seniors have been able to live independently of their children or third party care facilities. The disappearance of Social Security would almost certainly cause a massive collapse of the housing market (and its price structure) as millions of households would disappear.
Widespread impoverishment of the elderly. For millions of seniors, Social Security is either the largest part of their income or their only income. If it were taken away many would be unable to feed themselves or seek even basic medical care. Those who don’t have family or friends to move in with could quite literally be out on the street; that’s tough enough for the young, let alone for the elderly.
Political unfeasibility. Because of all of the above, the political party holding power presiding over the demise of Social Security will be voted out of office at the next election, never to make a significant appearance on the national political scene again. Politicians know this, and will do everything possible to prevent it from happening.
I’m not predicting any of this will play out, but I am hoping to show that if you believe Social Security will (or even can) go bankrupt, what you’re really calling for is doomsday.
The ramifications of the collapse of Social Security would be so far reaching, so catastrophic, that it would be impossible to believe that the program would go under and leave the rest of the country intact. The same conditions that would eliminate Social Security would be so severe that the possibility of having anything like a functional society—let alone a comfortable retirement—would almost certainly be out of the question.
To expect the bankruptcy of Social Security is to believe the United States as we now know it would no longer exist.
Planning for what ever the future of Social Security will be
If after all of that, you still believe that Social Security will go away, you’re best plan of action won’t be to save and invest money, but rather to map out some strategy for radical self reliance. Instead of concerning yourself over the most promising growth stocks or with paying off your mortgage, your time would be far better spent finding some raw land to grow your own food, as well as a power source and water supply to go with it. Beyond that, plan on working until you drop.
That’s the kind of world that will almost certainly exist if Social Security were to disappear. Not entirely because the program would no longer exist, but more because of the factors that will have caused it. I’m not certain we can even prepare for that outcome.
Now the doomsday scenario aside, what’s a more likely outcome and how should we be preparing for it?
More likely, Social Security will be there no matter what your current age. What the Social-Security-is-going-bankrupt prophets miss is that the cost of not having it are far greater than the cost of keeping it.
Yet you don’t have to be a prophet to understand that the program is due for a major day of reckoning. It’s probable that benefits will be reduced, made 100% taxable, or we’ll be paid in currency that’s worth far less than it is today. We should expect that there will be some benefit from Social Security, but also that it will be considerably less than it is now, especially in real terms.
It’s hard to prepare for a scenario that’s short on specifics, but flexibility and adaptability will be critical. Overall, plan for a lower cash flow at retirement than current retirees are now receiving.
Some steps to take now in preparation for less help from the government:
- Plan on a part time career or business for as long as you’re healthy enough to work
- Practice living beneath your means well before retirement
- Get out of debt and learn to live without it
- Save and invest more money than you ever imagined you could
- Invest your money conservatively; Social Security is a “social safety net”—if it’s cut back you’ll have less margin for error with your investments
- Invest globally; the economic fortunes of the world are changing quickly and not all of the best investment opportunities are here in the US
- Scale back expectations for retirement; plan on being happy even if you won’t own a vacation home in the tropics!
If you’re interested in developing additional income streams, either for retirement or to help prepare for it and fund it, check out my posts on freelance blog writing or running an online store. They’re the kind of work and business you can easily run well past retirement age.
I’ve kept this discussion restricted only to Social Security, but its sister program, Medicare, may be even more worrisome. Do you have any thoughts on how we should be preparing for major cuts in that???
Very nice summary of the issues and likely outcome. Also liked your list of preparations.
One thought: While you’re preparing for your own retirement with less income from SS, don’t forget to prepare to help your parents along the way. They are likely either collecting SS now, or soon will be, and have much less time to prepare for the inevitable (if hidden) cuts.
Remember the Waltons?
gn´s last [type] ..College Costs- The Bubble About to Pop
GN – Excellent point on taking care of your parents. That’s the hidden side of retirement preparations we don’t normally think about–the retirements of our loved ones.
That might very well look a lot like the Waltons. Even with Social Security remaining to some degree, the future of retirement may not look anything like what it has in the past few decades.
Why is self reliance so radical? Folks used to be able to do so much more for themselves, did we really gain anything by going to work for 50 or 60 hours (counting the commute), versus the local job and the chores around the family plot?
Vitaeus – Actually, there isn’t anything radical about self reliance in the bigger picture. I used the word ‘radical’ in a relative sense, meaning relative to the highly specialized one-man-one-job economy we’ve known in recent decades.
My grandparents lived it, and in the near future we very well may find out what it is first hand. I do believe that the system will hold together in some fashion that may be mostly on the surface. That’s the part we need to prepare for.
Unfortunately, I think that there will be some severe changes in order to keep it going. They seem hesitant to increase the cap on SS taxes, but they probably will once they see a chance to push it through. Then we will see the age increase and benefits decrease. I guess you can tell that I don’t have a lot of faith in the ability of our politicians to think long-term. If it goes down on their watch, they will still find a way to blame others!
I think, more than anything, this article shows us how devastating it will be to this country to lose SS.
Khaleef @KNS Financial´s last [type] ..Wyclef Jean for President – Publicity Hound or Political Inspiration
Kevin … something WILL have to change. Does that mean it Social Security will go away? No. You wrote – “It’s probable that benefits will be reduced, made 100% taxable, or we’ll be paid in currency that’s worth far less than it is today.”
All of the above will happen plus the starting age will be bracketed up significantly over the next decade or more. The challenge is funding and demographics … and how to deal with the problem in a politically palatable way (a big issue).
My advice – if you’re under 50, plan your finances as if there will be no Social Security for you. That means “self reliance,” radical or not. If you do end up getting something in benefits, it will be gravy. If you don’t, you’ll be ready. If you are 50-60, do what you can to shore up your finances and rely less on SSI than those 60 and above have planned for.
There will not be an apocalypse, but this is just one of many programs that is statistically and economically unfeasible in the long run. The sooner we come to accept that and start changing course, the better for us all.
John D. Buerger, CFP®´s last [type] ..Are We There Yet – Revisited
Khaleef – That’s why I doubt we’ll lose it, at least entirely. I agree that political will is lacking and that’s why we’re facing the choices that we are. Politicians hate saying NO–it cramps their self styled image of omnipotence. Saying no in small steps over the past 20-30 years would have avoided hard choices in the future (meaning now). Sadly the blame will fall on current politicians when there’s plenty of blame to go back more than a few years.
John – Another possibility is that it will be means tested, turning it into a welfare program. But whether it’s means tested or the retirement age is raised–70 is the number being tossed around now–many of the darker scenarios I listed above become possible. For many, the years from 65-70 are difficult financially and that could have broad implications. The reliability and predictability of SS have been major factors in the past 70 years and there will be consequences if those are suddenly in doubt.
KevinM´s last [type] ..Will Social Security Be There When You Retire
They will just continue to print money and pay benefits and let the future generations deal with the problems once they get big enough.
Jason @ Redeeming Riches´s last [type] ..How a Ghost Gave 156 Million to Charity
I see this playing out almost exactly like it did in the ’80s. The government will wait until it reaches a “crisis” stage. Then, they will raise both the S.S. tax rate and the retirement age. Unfortunately, they won’t have the polical will to protect the OASI Trust Fund, which is what is really necessary to shore up Social Security.
I wish the government would have acted a couple of years ago, when President Bush brought this up as a problem. Instead, reform was blocked and we are headed into the red, in the middle of a recession. This is going to make it more difficult to do what needs to be done.
The good news is that France just got real and raised their retirement age. I expect a lot of countries to follow this lead. Although this is never popular, especially for people close to retirement age, it needs to be done. The retirement age isn’t keeping pace with life expectancy, especially in America.
Jason – That’s certainly been the pattern so far…
Bret – Unfortunately, no one, especially in politics wants to come forward with bad news. That’s why were in the situation we’re in.
Hey, I know I missed the boat on this, but I still think it’s important to address some of these issues. Kevin M, you say that politicians have a hard time saying “no,” but that is exactly what both parties are doing right now. Right? There is a reason why the GOP is being called “The Party of ‘NO’” by the media. And, what about Tea Party members who have specifically stated that we need to get rid of Social Security and Medicare? Some of them have just made it into office–one of their goals while they are there is to phase out SS. I am worried that we as a nation have become too complacent, and we hope that our politicians won’t do this crazy stuff. But, hoping is different than taking action to ensure that it doesn’t happen. We have elected people who have railed against SS; now what?
Hello there, Thanks for your posting. I do know a lot of people which may find this helpful. This economy going for a turn has changed elements in ways that most individuals really don’t look at. We are not in the 2006 economic climate any more and issues are different. Anyways… Thank you for that posting yet again I’m going to check back in again later! Regards
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