Changes to Social Security

Will Demographic Trends Impact Social Security and Medicaid? Does Your Retirement Plan Lean Too Heavily on These Programs?

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Increased life expectancy is combining with another demographic trend to further complicate the mathematics of retirement: Seniors now represent a much larger percentage of the overall population than ever before. Those aged 65 and older now represent 15% of the developed world's population, a huge increase over the 2-3 percent recorded until recently.

The U.S. census data indicates that there are:

  • About 24.3 million individuals in the 55-64 age group that are on the cusp of retirement.
  • Following on their heels are the 77 Millions Baby Boomers, who are currently 40 to 58 years old.

While this means you will probably find it easier to rustle up a foursome for golf on a Wednesday morning, it also translates to more people becoming net takers, not net givers – more people will be spending assets (including Social Security) than are creating assets and contributing value.

Just as significant is the fact that there has been a large drop in the global fertility rate. Today, the number of children being born in the U.S. is only just equal to deaths, a historical first. In fact, the average U.S. household has declined in size from 4.6 in 1900 to 2.59 in 2000.

In economic terms, this means the huge numbers of healthy baby boomers that may spend 15 to 20 years in retirement are not being replaced by enough young people who will fund their retirement through contributions to social services.

What do these demographic trends mean to you?

"So what if my savings are not enough to see me through retirement. Social Security will pick up the tab, right?"

Well, not necessarily. You may feel that all those Social Security contributions every month from your paycheck should come good once you stop working. However, the reality is that the U.S. demographics are changing:
  • More seniors living longer.
  • Fewer young people joining the workforce.

These demographic changes are having a profound impact on Social Security. In order to fund social services, governments make the assumption that a large and vibrant workforce will pay for the services needed by a relatively small number of retirees and low income people. These assumptions are now being questioned seriously by analysts.

Ratio of workers to Social Security beneficiaries is declining

The cost of pensions (like Social Security) will absorb an extra three percentage points of the GDP of rich countries by 2050, while long-term health care could take another one point, according to Howard Oxley of the OECD. In the U.S., unfunded liabilities stand at $44.2 trillion, states a report from the American Enterprise Institute. Alan Greenspan, chairman of the U.S. Federal Reserve was quoted as saying that "we will almost surely be unable to meet" the demands on resources that baby boomer retirement will create.

Experts disagree about the direness of the Social Security situation – whether it will really be bankrupt or not and when -- and the issue is becoming increasingly political. Some lawmakers advocate changing the benefit distribution rules of Social Security (which were written in 1935 and do not accurately fulfill the needs and characteristics of today’s society), others support privatizing the entire system – fundamentally changing the nature of this government service.

It is clear that Social Security will not disappear entirely, but it is highly likely that it will evolve and change. Social Security provides a necessary safety net for most people in retirement – and any change is bound to have a significant effect on your retirement plans.

If you are concerned about your guaranteed retirement income, you might explore Lifetime Annuities and Annuitized Reverse Mortgages as well as other retirement financial strategies.

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