Well I can say that when I wrote the first article I had no intention of writing a follow up. However, due to the comments as well as a mention on another website I'm not sure people understand the issue we are facing. Social Security is in trouble. The program as a whole is not necessarily going bankrupt any time soon. However, the current data does show us that over the next couple of decades benefits are set to be considerably reduced and we are in the process of this occurring.
A CNN article reported that a couple turning 65 in 2010 had paid $600,000 in Social Security taxes; both employee and employer contributions. However, when in retirement the same couple should expect only $579,000 in benefits. That is 96.5% of their money back; not to mention inflation. Why? The article states that there is a discrepancy between how much is being paid into the program as opposed to how much is being paid out.
Younger generations have to pay more into Social Security for the same benefits. Now why is this? Simply put, there are fewer people paying into Social Security who are supporting more retirees. Social Security is set up so that the money paid in, by working individuals is then directly paid to people receiving benefits. Here is a graph of the fertility rate for the years ranging from 1930-1979.
Children per Woman
The fertility rate for 2011 was 1.89. In order to sustain a population we need a fertility rate of at least 2.0. At a rate of 1.9 it means that we have fewer people to pay into Social Security, and essentially a declining population. This coupled with a higher unemployment rate, people not paying into the program who normally would, places more stress on the program.
So what does this mean for your retirement? According to the Social Security Administration in 2033 retirees will only receive 75% of the benefits they are expecting. This means if you paid in $500,000 in Social Security taxes and you retire after 2033 you should expect, at best a return of $375,000.
The bad thing is that this is expected to happen under current law. The good thing is that we still have 20 years for this to fully kick in, which is plenty of time to prepare.
I truly believe that long-term dividend growth stocks are the superior way to invest for retirement. Currently, I have positions in Coca-Cola (NYSE:KO), International Business Machines (NYSE:IBM) and Wal-Mart (NYSE:WMT). All three of these stocks have a great history in paying dividends and a great history of growing the dividend as well.
Payout Ratio: 52%
Paying Consecutive Dividends: 93 years (since 1920)
Increasing Dividend Payment: 51 years
International Business Machines
Payout Ratio: 23%
Paying Consecutive Dividends: 97 years (since 1916)
Increasing Dividend Payment: 18 years
Payout Ratio: 32%
Paying Consecutive Dividends: 39 years (since 1974)
Increasing Dividend Payment: 39 years
Simply investing into solid dividend paying stocks does not necessarily mean you will have enough to offset the lack in Social Security. If you are not allocating enough for your retirement goals and do not take into consideration the lack of return from Social Security it can place many hard working people in trouble during retirement.
What can I do?
First thing is talk with your financial adviser if you have one. See where you sit, not only with only getting 75% of your benefit but also with no Social Security. If you do not have an adviser to help you here is some basic information to help you compensate for the possible shortfall.
An employee pays 6.2% of his/her paycheck in Social Security taxes. The employer also pays 6.2% for a total of 12.4% of your income that is paid into Social Security. The 25% shortfall based on this is 3.1% of your income. Now this is based on numbers 20 years from now, it will take time to increase to 75%. If you are able to increase your retirement funding by up to another 3.1% of your income, compounded over the next 20 years, you should more than make up for the expected Social Security shortfall.
Social Security contributions start when you get your first job, at age 15 or 16 for many. However, at that age we are too busy with teenage drama and do not necessarily think about the future. The best asset when investing and building wealth is time. The second is the amount of money you are able to save. At an early age start putting away as much as possible. Parents and Grandparents have just as much responsibility to teach their children good savings habits as the children do when they can practice these habits
The way the laws are currently set up we will have this shortfall. Obviously, there needs to be an overhaul. The way the government is right now, it will take some time. In the mean time, make sure you take the proper steps to protect your family and wealth and take into consideration a World without Social Security.