published Wednesday, May 9th, 2012

Personal Finance: Prepare for retirement with less Social Security

Chris Hopkins

The trustees of Social Security and Medicare have just issued their annual report on the financial condition of those critical programs.

If you still are working with more than just a few years left to go, they have a message for you regarding your own retirement savings: kick it up a notch. If you have more than 20 years until retirement, kick it up a couple notches.

Social Security and Medicare represent the two largest federal government programs, comprising 36 percent of total U.S. government spending last year. Owing to several well-known factors, the current level of benefits is unsustainable at present levels and requires significant restructuring to maintain solvency for future recipients.

For example, at its inception in 1935, each recipient of Social Security benefits was supported by 42 workers. Today, there are only 2.8 workers per retiree, and that ratio will fall to 2 to 1 by 2050.

The latest trustees' report carries the strongest warning about the retirement safety net since 1983, the last time a major rescue effort was mounted.

Beginning in 2010, annual expenditures for Social Security benefits exceeded tax revenues, necessitating a drawdown of the trust fund assets.

In the absence of corrective action, the deficit is projected to widen each year until the entire trust fund balance is depleted in 2033. This depletion date is three years earlier than the previous report predicted, now just 21 years away. Thereafter, current tax receipts would be sufficient to fund only about 75 percent of promised benefits.

If you are currently retired, or if you will qualify for benefits in the next few years, rest assured that your scheduled payouts are secure. Although Social Security and Medicare are pay-as-you-go systems, the existence of trust funds serves as something of a buffer delaying the final date of insolvency as surpluses from prior years are consumed.

It is highly unlikely that any current beneficiary would see curtailment of benefits, even if nothing affirmative is done to address the shortfall. No reform plan under discussion contemplates reductions in current payouts.

For future retirees, however, the story is different. Virtually any viable reform requires some combination of higher payroll taxes and reduced payments for the cadre of workers under age 45. This makes it even more imperative to take responsibility and step up one's own personal retirement savings and investment. This has always made sense, but given the growing constraints on the system it is all the more urgent.

And you are almost certain to get a better return. Most estimates of the equivalent annual rate of return on the money you contribute to Social Security over your lifetime range from 1 percent to 2.5 percent. Even conservative bond fund investments have significantly outperformed that mark over the past 40 years.

If you are 20 years or more away from your gold watch, better start planning now for less generous benefits from Social Security. Take full advantage of 401(k) and IRA accounts today, and let time work for you rather than against you.

Get answers to financial questions on Wednesdays from our columnists who work in the financial services industry. Christopher A. Hopkins CFA, is a vice president at Barnett & Co. Submit questions to his attention by writing to Business Editor Dave Flessner, Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by emailing him at dflessner@timesfreepress.com.

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