15 May Greenspan – Time to Fix Social Security
As Social Security gets to the point where it starts paying out more than it is taking in, experts are increasingly worried about its future and the economic impact it is having.
Former Federal Reserve Chairman Alan Greenspan warns that underfunded entitlement programs are “creating an odd imbalance in the system” and are restricting the growth of the U.S. economy. He recently told Fox Business News that “the actuaries of the social insurance system say that in order to be actuarially solvent through the life of the programs, we would have to cut benefits by 25 percent right now and extending into the future.” He adds, “the best way to solve this problem is to fund our benefits, get a balanced budget, and the system will work.”
Indeed, the Social Security Administration has warned that cash outlays to social security recipients will exceed inflows by next year, and by 2035, the entire balance of the fund will be depleted. At that point, Social Security will be able to pay out only about 80% of benefits, potentially putting a huge dent in retirees’ income.
One solution, Greenspan suggested, was a move towards defined contribution plans. “Sweden had very much the same problems we did,” he said. “What they did first to resolve them is go from a defined benefit program, which is what we have now, to a defined contribution. What we have is 401(k). 401(k)s cannot go broke – you can only spend what you get,” he added.
Fixing Social Security will likely require Congress to either increase social security taxes or cut benefits, neither of which is politically popular. In addition, pension plans from private employers are becoming scarce, and many of those still around are woefully underfunded, making it increasingly unlikely employees can rely on those to support their retirement.
The seemingly high chance of government inaction make saving for retirement all that much more important. This means that taking advantage of other programs for long term savings is critical. Anyone with access to a 401(k) plan should be contributing to one, especially if an employer offers matching contributions. IRAs, Roth IRAs, and even brokerage accounts can also help you save for retirement.
It is hard to know what the future of Social Security looks like, but the way things have been going, it’s become more important than ever for people to look after their own retirement saving rather than relying on Social Security to support them.