Millennials and Social Security

Let me start with a confession. I’m not a millennial. I’m a baby boomer. Been working since I was 15. For over 40 years I’ve been paying into Social Security. In return for my hard-earned money I’ve received promises about future payments. And, I’m not alone. The Population Reference Bureau says that there are 76 million of us boomers.

What does that have to do with Millennials? We all know (or at least should know) that Social Security is running out of money. Recently Reuters did an interview with the chief actuary of the Social Security Administration. They reported: “Social Security is not in imminent danger of running out of money, but it faces a financial crunch a bit further out – around 2035. That is when Social Security’s Trust Fund is projected to be exhausted due to the drawdown of benefits by the baby boom generation. At that point, the program would have sufficient tax revenue to pay only
about 76 percent of promised benefits.”

Clearly something will need to be done. There are only three ways to close that gap:

1. Cut benefits that were promised to seniors
2. Increase social security taxes on younger workers
3. Shift funding (and the problem) to the general U.S. budget (which
   will lead to deficit spending and inflation)

I’ll leave it up to you whether you should contact the President, your senators or representatives and suggest that they work on a solution now. But, given the fact that they’ve taken the opposite approach and lowered FICA rates lately to reduce the pain of a bad economy, it’s probably safe to assume that they won’t take any action in the near term that would close the gap between promises and expected revenues.

So what can a millennial do today to avoid trouble later? There are a number of things that you can do to put yourself in a better financial position for your future.

First, save as much as you can today. Don’t assume that it’ll be easier to save ten years from now when you’re making more money. It tax rates go up that might not be true. Or if inflation is consuming your paycheck it will be harder to save.

So save all you can today. Aim to save at least 10% of your take-home pay. Better still 15%. Not only will you be establishing the savings habit early, you’ll also have the magic of compound interest working in your favor. A dollar saved today is worth about twice as much as one saved 10 years from now.

Then guard your savings carefully. There are two major threats to your savings: taxes and inflation. Let’s look at each one separately.

First, taxes. Taxes can play a major role in the performance of any long-term savings plan. The reason is simple. Taxes slow down the benefits of compound interest.

Let’s take an example. Let’s suppose that your money is earning a steady 8% per year. At that rate it will double every 9 years. Pretend you’re 23 years old today and received $1 as a birthday present. You save it for retirement. That $1 will double when you’re 32 ($2). Again when you’re 41 ($4). Again when you’re 50 ($8). Again when you’re 59 ($16). Again when you’re 66 ($32). And again when you’re 75 ($64).

Now let’s suppose that taxes take 25% of your earnings each year. So your $1 birthday gift only earns 6% each year. Now it will double every 12 years. So it will double when you’re 35 ($2). And double again when you’re 47 ($4). And again when you’re 59 ($8). And again when you’re 71 ($16).

So avoiding those taxes are critical. There are two ways to do that. The obvious is to make your investments within a retirement account like an IRA or 401k plan. As long as your money stays within the plan it grows without taxes.

Another way to avoid taxes is to buy and hold investments that don’t pay interest or dividends, but increase in value over time. Income and dividends are taxed as ordinary income. But an increase in value is considered a capital gain and taxed at a lower rate (assuming that Congress doesn’t raise the capital gains rate). Plus, the gains are only taxed at the time you sell the investment, not each year as it
appreciates.

The second main threat to your savings is inflation. And, there’s good reason to think that we’ll see more inflation in the future. In part because of government deficits. Inflation allows a borrower to repay a debt with dollars that are worth less. And, government has the ability to print dollars that cause inflation. So you don’t have to be a conspiracy nut to think that there’s a good chance that we’ll see some inflation fairly soon.

If you’re working inflation isn’t so bad. Prices go up. Your wages go up. No harm done. But, if you’re a saver that’s different. Inflation is like a tax on savings. Every rise in prices means that your savings buy less.

What can you do to be prepared for inflation? Mainly be sure that some of your savings are invested in things that will appreciate if inflation occurs. Typically physical things like gold, silver, and real estate.

Consider something called an “asset allocation model” when you invest your savings. It’s a balanced approach. The design is such that if economic events are bad for one type of investment they’re also good for a different type. So you don’t hit home runs, but you don’t strike out either. Long-term it’s the safest way to invest.

We don’t have the time or space to suggest individual investments. Plan on doing some online studying or contact an investment professional for help in deciding where to stash your savings.

Bottom line? There’s a financial crunch ahead. Both boomers and millennials would be wise to start taking action now. Waiting could mean a very rough time in just a few years.

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