Funding Your Retirement 101 — (Wish they taught that at UVM?)

As a student you probably have a hard time planning for the future. Sometimes it is a bit stressful and uncertain. Money is always short and there is never enough time to do it all. It’s hard to find the time to keep up with current events and politics but sometimes it’s important to do so.

As a college student you are probably more concerned with finding a job after you graduate, and paying off loans than with funding your retirement, but advanced planning can really make a difference. Even if you don’t consider yourself to be politically active you should care about your own future, and therefore you should care about the future of Social Security. If you watched the State of the Union address or read the paper you know that “personal accounts” are the buzz word of the day. You should know that there is currently no bill on the floor of the House or the Senate which proposes a change in structure or funding of our Social Security system. Despite what you may have heard, Social Security is not facing a short term deficit; there is no crisis yet. So why all the hubbub?

The way our system works: Our current social security system is a pay-as-you-go system as opposed to a pre-paid system. This means that those people and employers paying into the system now are helping to pay the benefits of those Americans who have already retired. Retirees don’t get the same amount of money they paid into the system; they actually get on average a bit more. Ever since 1972, in order to account for the ever increasing cost of living, retirement benefits have been rising instep with the Consumer Price Index (CPI). Social Security, as the name implies is a form of public safety net, which ensures that people set aside money for their retirement. It was designed to protect the elderly and disabled against poverty. Although most Americans also have some other way of funding their retirement, Social Security is the largest source of income for elderly Americans .

In fact, “sixty percent of today’s beneficiaries derive more than half of their income from Social Security “. What if you are a future member of that 60%? According to the AARP, “an individual would have to save an additional $250,000 while working to replace the benefits Social Security provides over an average retirement lifespan.”

What lies ahead? What is all this talk I hear about “insolvency” and the system going “bankrupt”?

I said that our Social Security system is pay-as-you-go, but since the baby boomers have hit the work force, and since we experienced such an economic boom period during the 1990’s payroll revenues have been substantially higher than the payouts to current retirees.

The “extra” revenue has been amassed into a trust fund held mainly in US government bonds and right now there is enough in the Trust fund to pay retirees full benefits until at least 2032 and up to three- quarters of benefits for generations after that, according to the Congressional Budget Office and substantially longer depending on where you get your figures.

Splendid! That means our generation takes the benefit cut? Not necessarily, it’s a bit more complicated than that, and there is still time for change. In the simplest terms, this problem exists because too many people are collecting benefits for too long and not enough people will be paying into the system for us to get the same benefits current retirees get unless something changes. This demographic change is a fact of life, we can’t change it but we can adapt to it to ensure that old age poverty doesn’t increase drastically.

Some of the ideas about how to change the system are less drastic than others. Depending on whether you would be affected by each change they may seem more or less drastic to you. Among the plethora of plans being discussed are, raising the cap on income which is subject to the payroll tax, pushing back the age at which you can first receive benefits, decreasing benefits, changing the index by which benefits are calculated (from wage to price indexation), increasing the payroll tax (either on workers side, employer, or both) using government revenue from some other source to pay for social security, investing the Trust fund as a whole or part in something which yields higher interest.

Another plan would create “personal accounts,” which is one way of moving the system to a pre-funded system, and in the long run could potentially give retirees higher returns, but might also expose retirees to the type of risk the system was designed to prevent .

Something to keep in mind when reviewing all these suggestions: “There is no free lunch,” all reforms will have transition and administrative costs associated with them. Some plans would put the burden of reform on our generation more than others though.

What do I want you to do about it?

Is all of this talk of reform just confusing you? Yeah, it confuses me too, and policymakers and economists as well. Don’t through up your hands though; especially not if there is about $250,000 in benefits at stake for each of us. One easy way to become more informed and to influence the government right away, is to come to the Congressional Town Meeting on Social Security On Saturday, March 5th, at 12:30pm at the Holiday Inn 1068 Williston Rd, S. Burlington Vermont.

As a citizen of voting age you should decide which plan is likely to benefit you and the people you care about and let your government officials know. Come talk to Bernie Sanders, the Vermont member of the House of Representatives about what Social Security has to offer you. If you want some more information on the meeting or you need a ride please call 1-800-339-9834.