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Social Security Woes and You

Last week Alan Greenspan made news in a speech to the House Budget Committee in which he discussed in some detail the impending crisis of Social Security and Medicare. The Early Show financial advisor Ray Martin explains what this means for current workers and retirees.

Basically, Greenspan said that Social Security as we know it today cannot continue to exist. Down the road, there will not be enough money to pay folks the benefits they are due, so some changes will need to be made.

This is no secret. Not only has Greenspan warned of this before, it was a major issue in the 2000 election, and it's even printed on the front of the Social Security statement you receive in the mail each year.

Those who are already collecting Social Security benefits or are close to retirement don't have much to worry about. Those who are truly going to be influenced by changes in Social Security are young workers.

We all know how Social Security works - you and your employer both pay a tax that goes to the government. This money is then used to pay benefits to retirees. The system is bringing in more money in taxes than it is paying out in benefits - there is even a surplus of over $1.4 trillion.

However, in 14 years, all of this will change. It's predicted that in 2018, benefit payments will begin to exceed taxes collected. At that point, the surplus will help cover the gap. But by 2042, the surplus will be depleted. Sometime in the next 38 years - between now and 2042 - changes are going to need to be made.

However, Greenspan and other experts are encouraging the government to make changes sooner rather than later. It will be easier on workers if the changes are gradual, if they have time to prepare for changes.

If nothing is done, benefits will be reduced by about 27 percent. This means, instead of receiving $1, retirees would receive .73 cents. If there are still no changes, benefits will continue to be reduced.

So although the system will have to change in order to survive, Social Security is not going to disappear. Every developed nation has some form of social welfare net for older citizens.

Why are we in this troublesome situation in the first place?

  1. Baby boomers are preparing to retire and there are not enough new workers to replace them. In 1950, there were 16 workers paying taxes into Social Security for every one person collecting benefits. Today, that ratio has shrunk to 3.3 to one; by 2033, it is projected to stand at 2.1 to one.
  2. People are living longer which means they are receiving more benefits.

Greenspan made some specific suggestions about how to fix the problem: Change the official retirement age (you won't be eligible for benefits until age 69, for example) and/or reduce the annual cost-of-living increases for retirement benefits.

Others have suggested increasing the taxes that workers and employers pay into the system. President Bush has suggested establishing personal retirement accounts in which part of the taxes you pay would go into a private account instead of going to the government. All of these solutions continue to be debated.

To prepare, younger workers should not rely on these benefits completely. The benefits are going to change - somehow - during your lifetime and there's nothing you can do about it. It's your responsibility to start saving for your own retirement.

Martin's recommends those workers take the following steps:

Review Social Security Statement: If you are over 25 years old, you should receive a statement from the Social Security Administration each year. It records your earnings, Social Security taxes paid, and your estimated benefits. Review this for accuracy and understand the portion of your retirement income that may come from this benefit.

Calculate Retirement Needs: Believe it or not, only 37 percent of people say they have thought about how much money they will need once they retire. There are a number of retirement calculators online that can help you figure this out. Determine how much money you will need and how much money you need to save.

Increase Savings: You hear this all the time. Figure out a way to make it happen. Again, you can't count on Social Security to meet all your financial needs in retirement.

Downsize Your Debt: If you have high interest-rate credit card debt, redouble your efforts to pay this down. Do this by reducing your expenses, increasing your income, selling some of your stuff, or a little of all three. When your debt payments are reduced, you will be able to save more. Also, if you have a mortgage, make an extra payment each year. This will shorten a mortgage from 30 years to 17 years, increase your equity and reduce your housing costs - and will help you to compensate for a possible reduction in benefits from Social Security.

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