Retirement Planning in the United States - Essay Example

? In the United s, Retirement Planning is Essential. Social Security Will Not Be Enough to Cover Our Needs When We Are Retired Jonathan S. Rhodes COMM/156 8 August 2011 Larry Schnell Social Security program is carried out by the government of the United States to provide retirement, survivor, and disability insurance to its citizens. According to Feldstein (2005), the Social Security program of the United States is considered to be the largest program initiated by the government in the world, and it is the largest expenditure in the federal budget. This large-scale government program offers benefits to retirees, to the survivors and the disabled to ensure that they do not have to struggle to make ends meet. However, this program is under scrutiny as it is estimated that in the next decades, as more and more citizens of the Baby Boomers generation retire, the payouts would be higher than that of the benefits. The current stress on the economy along with an uncertain future about the Social Security program adds further concerns. The wide speculation is that the benefits gained out of this program would not be enough for retirement and there is a need to look at additional investment options such as IRA and 401K. Hence, relying on Social Security program would not be enough to suffice for the entire retired life. Retirement planning in the United States is essential and Social Security program is not enough to cover all the needs post retirement. The social security program came into existence in 1935 and has undergone several amendments since then to include many different social welfare clauses. This program works through the payroll taxes, where the individual pays a certain amount and the employee also adds that amount. This constitutes a fund that is released at the time of retirement along with the interest amount added to it. Hence, the goal Social Security is to work as a unique program where citizens do not have to undergo financial stress to save money for retirement. For a participant of the Social Security program, the benefits are given out in the form an annuity, which is paid for the rest of the beneficiary’s life. The benefits are also adjusted according the level of inflation in order to make sure that the benefits are not less as time passes by (Brown et al, 2009). In addition, this program also has benefits for the spouse and the dependents to support the family even in an event of death. Hence, this program aims to provide real benefits to the retiree. The social security program was designed in such a manner that it should cover all the needs for a retiree and there should be no need of an additional investment in terms of retirement planning. However, in the recent times, there have been apprehensions about whether social security would be enough to cover all the needs during retirement. There are some main reasons that are causing this concern among the American citizens and forcing them to consider other factors. They are the funds of the Social Security program getting exhausted, weak economy and demographic trends. One of the main concerns is how the social security program would be drained out of all its funds in the years to come. This would happen because a huge chunk of population, the Baby Boomers generation would retire in the next decade, causing a huge deficit on the funds of social security. In 2010, the total income that was earned through the tax payroll was $781.1 billion, where as the amount that was paid through the taxes were $721.5 billion. Hence, there was a total increase in assets of only $68.6 billion (Whibey, 2011). According to the estimation done by Ohlemacher, this fund would totally drain out by the year 2037. In 2011, it is projected that social security would collect around $45 billion less in payroll taxes than what it would pay out during retirement (Ohlemacher, 2011). Therefore, according to the rate at which the Social Security funds are getting exhausted, it would be impossible to sustain this program without any legislative intervention. It is speculated that legislative intervention could mean changes that considerably reduce the benefits. Therefore, Social Security cannot be considered as a sole and exclusive source of retirement income, especially for those people who plan to retire after around 20 years. In addition, a weak economy is also not contributing to the possibility of the Social Security program getting increased payroll taxes. Because of the economic recession and a high number of job losses, the payroll taxes are lagging behind their estimation and the number of applications for the benefits is increasing. This will create an imbalance and hence, cause the social security funds to get exhausted, raising concerns among the potential beneficiaries. Hence, due to the economic recession as well as due to the population imbalance among the different generations, there is a heavier stress on the social security program, leading to the chances of this fund getting exhausted over the next couple of decades. Other factors that have contributed to an increased risk of the fund running out include low rate of population growth when compared to the Baby Boomers generation and increased life expectancy (Reuteman, 2010). In addition, a large group of employees are also opting for early retirement. This gives a strong indication on how Social Security will not be enough as the single retirement planning program. The fact that the Social Security program may not be enough during the period of retirement can be illustrated by the following numbers. For an individual who retires in 2011 at the age of 62 and who had an average indexed monthly income of $7928, the monthly estimated benefit that he or she would get would be around $1803 as monthly service, if they have worked from the age of 22 (Social Security Online, n.d). In comparison, the average cost of living for a single individual living in San Francisco, CA is around $2000 (Living Wage Calculator, n.d). Hence, the benefits from Social Security prove to be much lesser than the average cost of living, which means that Social Security alone is not enough for comfortable living during retirement. When the social security program has excess funds that are not required to be paid out to the retirees or beneficiaries, it is deposited in trust known as the Social Security Trust, which serves as the repository. However, because of the high expenditure and low income, it is estimated that by 2015, government would have borrowed around $3 trillion from this fund to pay the retirement funds and the benefits to those who have opted into the plan (Social Security, 2008). At this rate, during the phase between 2015 and 2037, the government may have to look at alternate ways of taxes to make the payments, in the process, liquidating the cash storage of the Social Security Trust. It is estimated that by 2037, the income through the payroll taxes would be only around 78% of the amount that it is supposed to payout (Cashell, 2009). Therefore, if there are no changes to the current method of how Social Security income and payout work, then there is a high chance that this program will not work effectively. In practical terms, this means that beneficiary plans may undergo a change, where the retirees may not get the current benefits and hence, it would be difficult to sustain the livelihood without drop in the standard of living. Another important concern is that in the light of the economic situation, the federation has the power to alter the laws and benefits related to this program, to sustain it at a lower scale. This would mean that tax payments may increase, but the benefits may be reduced. Hence, in the long run, it may not be a beneficial program for those who opt exclusively for this method of retirement investment. Therefore, the future of social security would largely dependent on the political and economic outlook of the nation. In such a case, Social Security may cease to be a viable retirement plan for the younger generation, because of the demographic patterns, where the number of the benefits to be given to the retirees would far exceed the tax payrolls collected. Due to all these factors, there are vast speculations about social security being considered as an only means of retirement provision. How much retirement savings is enough is a subjective issue. The common notion is whether the savings are enough to make sure that there is no decline in the standard of living after retirement happens. Given the current economic situation, most researchers are of the opinion that there is a strong need for retirement planning in the United States. Additional plans such as 401K and IRA are needed to provide the supplemental income. If the situation moves to such a state the employee would be required to pay a higher amount of tax, but would not receive the expected benefits that would ensure that the standard of living is maintained, then there would be a need to look into additional forms of investment. According to the research done by Power in 2011, an estimated amount of $39, 302 would be needed annually for comfortable living (Power, 2011) where as the annual benefits from the Social Security program would come to be only around $ 21, 636 (Living Wage Calculator, 2011). Therefore, it is sufficiently clear that benefits out of the Social Security plan would not be enough for a comfortable lifestyle after an individual retires. While it is true that the Social Security program will continue to provide support and benefits to many retirees for years to come, it is also recommended that they should invest in another method just to provide a cushioning factor in case policies and regulations around social security policy changes and does not provide benefits as they used to. Therefore, the Social Security Program as the only means of retirement investment may not necessarily be enough because of numerous factors such as economic changes, different demographic patterns, higher expenses, and lower tax payrolls. Therefore, it is strongly recommended to opt for an additional form of investments such as IRA and 401K that can ensure that there is no need of any financial crunch post retirement. Both these are retirement plans, where the employee saves a particular percentage as an investment and can be withdrawn after a certain number of years. Hence, a combination of social security along with a long term investment program that offers retirement benefits would be the right way to move ahead. References Brown, J., Liebman, J., and Wise, D. (2009). Social Security Policy in a Changing Environment. Chicago : University of Chicago Press. Cashell, B. (2009). Social Security, Saving, and the Economy. Retrieved Aug 8, 2011 from http://aging.senate.gov/crs/ss18.pdf Feldstein, M. Rethinking social insurance. (2005). American Economic Review, 95(1), 1–24 Living Wage Calculator (n,d) Living Wage Calculation for San Francisco County, California. Retrieved Aug 8, 2011from http://www.livingwage.geog.psu.edu/counties/06075 Ohlemacher, S. (2011). Social Security Fund will be Drained by 2037. Retrieved Aug 8, 2011 from http://www.msnbc.msn.com/id/41293592/ns/politics-more_politics/t/social-security-fund-will-be-drained/ Reuteman, R. (2010). Will Baby Boomers Bankrupt Social Security? Retrieved August 8, 2011 from http://www.cnbc.com/id/34941334/Will_Baby_Boomers_Bankrupt_Social_Security Social Security. (2008). Social Security Administration USA. Retrieved Aug 8, 2011 from http://www.socialsecurity.gov/OACT/solvency/PRyan_20080521.pdf Social Security Online. (n.d). Automatic Increases. Retrieved Aug 8, 2011 from http://www.ssa.gov/oact/cola/examplemax.html Power, T .(2011). A comfortable retirement : How much super is enough? Retrieved Aug 8, 2011from http://www.superguide.com.au/superannuation-basics/a-comfortable-retirement-how-much-super-is-enough Whiby, J. (2011). 2011 Annual Report by the Social Security Board of Trustees. Retrieved Aug 8, 2011 from http://journalistsresource.org/studies/government/politics/social-security-report-2011/ Read More