Michael on October 30th, 2007
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“What do you think about private savings accounts for Social Security? Will they happen?”

Recently, I was asked those questions, both in an environment where it was smart to remain apolitical (kind of like this blog). Still, after explaining that such a topic was inherently political, I shared my thoughts:

I have no idea what will happen.

You: There’s someone being honest.

Total Candor all the way, my friend. What we should feel confident in is that something will happen. But even that is uncertain. Our government has known of the coming problem (briefly, that soon we won’t have as much Social Security money coming in as going out) for decades. Short of a few cosmetic patches, nothing has been done. Based on simply reading the newspapers, here are some of the more widely discussed possibilities:

  • Raise taxes. Currently, the Social Security tax rate is 12.4%. You pay half and your employer pays half. Unless, of course, you’re self-employed. Then you get to pay both halves. (Personal note: this doesn’t feel like much of a reward for starting a business.) So, one possibility is to increase these tax rates on the theory that doing so would bring in more money to support retirees.
  • Get rid of the cap. During 2007, the Social Security tax is paid on the first $97,500 of wages. After that, you pay nothing until 2008. One possibility is to remove or raise the cap. Again, the thought is that this would bring in more money to support retirees.
  • Lower Social Security benefits or reduce the amount of the annual increase. Just changing the formula would likely mean less money would go out to retirees.
  • Increase the retirement age. For anyone born after 1960, full retirement age is 67. By changing the retirement age to 68 (or even older), retirees would either receive less money, receive it later, or both, theoretically prolonging the existence of the fund.
  • Establish private savings accounts. You could save part of your money that would otherwise go to current retirees in an account with your name on it. This would (likely) help the rate of return you get for your retirement. But then this money isn’t available for current retirees.

Which of these changes are selected and to what extent is an excercie best left to those who can read tea leaves or pick the NCAA Final 4 correctly without knowing that basketball is involved. My best guess is that nothing happens until the next election cycle–at least. At that point, all the items listed above would be possible, as would something else not listed. Unfortunately, doing nothing remains a distinct possible outcome, as it is the easiest to accomplish.

All the more reason to begin living Beyond Paycheck to Paycheck today. I’d rather do everything possible today to ensure my retirement isn’t completely dependent on what the government does to the Social Security program. Or doesn’t do.

What do you think will happen? What would you like to see happen?

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