Social Security or Social Insecurity? Millennials should watch out for future.
April 16, 2014
As college students, we are in a transition from young adults with little responsibility to being the next young professionals. And while we might still feel young, there are a lot of responsibilities coming our way that we must prepare ourselves for. One of those responsibilities is Social Security.
I know I’ve probably already lost most of you. You’re probably either thinking retirement is a long way off, or you don’t even know what Social Security is. I promise you what I have to say might not come across as exciting, but it could drastically change your life in the long run–most likely for the worst. Take five minutes, read this story, and learn how to prepare yourself for the massive vacuum suction that Social Security will be on your wallet and your future savings.
What is Social Security?
Social Security is a couple of things. The National Academy of Social Insurance explains it as “the foundation of economic security for millions of Americans.” Basically, Social Security is a government-run program that manages a huge pool of money collected through taxes and interest. That money is used to help pay for retirement and disability services of citizens and their families. The majority of benefits are awarded to retired workers each year. According to the Congressional Research Services, last year approximately 65 percent of funds went to retirees.
So where does all that money come from? Well, there’s a good chance you’re already contributing to the Social Security money pool. If you’re working and paying taxes each year, you guessed it–you’re a contributor.
Employers are also required to make equal tax contributions for each employee, as in they additionally pay what you pay. Technically, you’re taxed for two things: the first is labeled Social Security and covers retirement, liability insurance and surviving family members. The second is Medicare, which covers hospital insurance.
Social Security taxes are based on your income bracket. The current tax rate is at 6.2 percent for social security and 1.45 percent for Medicare, bringing us to a grand total of 7.65 percent annually. So with both you and your employer paying taxes, the government collects approximately 15.3 percent of your salary’s worth each year.
The millennial dilemma
So what exactly should you be worried about? Throughout the years since Social Security was first implemented, the average life span has increased, along with our nations’ population. The baby boomer generation is the largest in American history, and they began retiring in 2008. As the rest of the boomers retire, the number of beneficiaries relying on Social Security will exceed the number of people in the workforce paying into the program.
Social Security is majorly supported throughout the years by a trust fund. Every year the government has excess funds that were not used for benefits, they put that money into the Social Security trust fund. Money held in the trust fund is invested into government-backed securities, meaning they are considered safe investments. If the market were to fail, the U.S government would protect those benefits.
Bringing us back to the dilemma, with a decreased number of people paying into Social Security the funds being collected to support beneficiaries are insufficient. We are now relying more and more on money that has been saved in the trust fund. And as we deplete the trust fund there will be no money flowing back into it.
The Social Security trust fund is projected to be exhausted in 2033, when the majority of millennials will still be decades away from retirement.
Where does this leave us?
Just because the trust fund is going to run out doesn’t mean Social Security will cease to exist. When the time comes, Social Security benefits will decrease from covering 100 percent of promised retirement benefits to only covering 75 percent. In addition, you can most likely expect an increase in the Social Security tax rate, the maximum taxed salary limit and the age of retirement.
This will leave the younger generations to support a massive retired population and pay larger amounts into the pool while receiving less benefits out, forcing them to remain in the workforce longer.
While some people remain at ease about the dilemma because they feel we have 20 years to fix it, I beg to differ. The time to act is now. We know that there are going to be problems in the foreseeable future, so let’s not procrastinate.
What can you do?
Future security may seem a bit unreliable at the moment but there are options. I sat down with Dr. David Ely, the interim associate dean of finance at San Diego State’s College of Business Administration and discussed the current dilemma with him, which he believes should be on the minds of millennials. While he doesn’t feel younger generations should be overly frightened, he does have a few words of advice.
“It’s a more complicated system these days because the company isn’t protecting you through life,” Ely said. “Students have to rely on IRAs or similar retirement vehicles that they would manage themselves and they have to do a lot more work, I think, on ensuring their own security.”
He suggested students take a little time to learn about other retirement plan options out there so they can start preparing for their futures now. With options such as IRAs, you’re in control of where your money is invested. Starting young gives students the opportunity to mix up their individual plans with stocks, mutual funds, securities and treasuries that vary in level of risk. Because we have a significant amount of time before retirement, we can afford to play around with riskier investments, which typically yield higher returns. Learning about the potential ways to secure individual wealth separate from the government could be key to a bountiful retirement down the road.
Retirement is probably still the farthest thing from your mind, but financial security in the future should always be on the mind to some extent. Even if you don’t go setting up a retirement plan today, you should take the time to become educated about the major changes that will more than likely affect your near future.
Photo courtesy of Thinkstock.