Ask a Grown Up: What the Hell is Social Security, Anyways?
Welcome back Broke-Asses! Hang onto your hookahs, this week’s column will seem TL;DR, but these 1,500 words are critically important to your future well being (and, ability to afford a private nurse to change your poopy Depends™ far in the future). That’s right! We’re segueing from talking about faking boyfriends to taking a closer look at something that -for most of you- won’t be relevant for decades… RETIREMENT!
More specifically, saving for retirement.
Imagine grandpa with a trucker cap, crazy mustache and an arm full of tattoos, that’s you in 40+ years!
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This week’s question comes to use from R.Z. in San Francisco, she asks:
“Grown Up- How can I ever save for retirement when I can barely afford rent on my Mission apartment? What the hell is Social Security anyways? Wouldn’t buying organic veggies and a gym membership be a better use of my meager discretionary income than paying into some imaginary fund that may or may not be there in 40 years?”
I’m going to be honest, R.Z. – saving money has never been my strong suit. While I lived in San Francisco, I struggled with the same issues that you are facing now. Working at a full time job, paying an astronomical rent for a room in a cold water Mission flat that -at 35- I shared with two other women. I barely had enough money to pay all my bills, buy groceries and keep myself clothed… let alone having any significant expendable income. Then there was always that night out with friends, or a new bag, or a concert, or sushi, or [insert materialistic whim here] that sucked up every last penny, so that I was living -essentially- paycheck-to-paycheck.
When you’re in that cycle, it’s tough to think about saving any money, let alone for something as intangible as retirement – a weird imaginary line you’ll supposedly cross after you turn 65 years old.
All joking aside, how awesome is Gladys? At 92 years old, she holds the record for the oldest marathoner.
But saving money, for retirement or not, is something really important to think about.
As you’ve mentioned – you can’t completely rely on Social Security to support you in your old age. CNN Money reports that the government says that there is enough in the Social Security Trusts (more on that in a minute) to pay out benefits at the current levels of support until 2041. Which if you’re in your 30s or 40s is good-ish news, but not so much for those 20-somethings out there. Although, skeptics say that the SSA Trusts might be in the red as early as 2016, as other branches of the government have borrowed funds from the Trusts and have not payed them back, as of yet.
Shocking, I know. [/sarcasm]
However, in that situation, it seems clear that our government’s solution to this problem will be to borrow more money from outside sources (i.e. foreign governments) and inflate our national debt to honor its’ commitment to the American people through 2041. After which time, who the f-knows what will happen with the SSA?
So what is Social Security, anyhow, and why the hell do we all have to pay into it if we’re aren’t even sure we’ll get that money back at some point?
Social Security is a direct result of the stock market crash of 1929 and the Great Depression. When the Social Security Act was enacted in 1935 as part of FDR’s “New Deal,” the purpose was to “limit the burdens” of old age, unemployment, disability and death. [via Wikipedia] The SSA has been through various revisions over the years, but in it’s current state it is broken into two trusts:
The Social Security Administration also funds Medicare, but that program technically is part of a different financial structure.
The way it works is that each adult of working age (16+) pays a percentage of their income into FICA, which are non-refundable, mandatory taxes to fund these programs. The income is divided amongst the relevant funds and disbursed to beneficiaries (people 65 years of age, or otherwise qualifying for benefits). Over the years that people have been paying into FICA, as a reservoir of savings built up, the government invested the excess, creating a larger trust. But, due to other agencies borrowing against it and the high number of “baby boomers” currently collecting or about to collect benefits, the trusts are diminishing at a rate faster than the currently employed are paying into it. WHICH is why you cannot rely on it being there for you when your time comes to retire.
Not to mention, the current monthly SSA payout for an individual is $773/month, which isn’t even enough to afford the rent on your room in the flat in the Mission that you share with your current roommates. (Imagine being 65+ and still having roommates. How hard would that suck?)
So yes, R.Z. – buying a gym membership, eating well and getting regular physicals would probably be a better use of the money you are paying into FICA. Unfortunately, you don’t really get a say in whether you pay those taxes or not, unless you’re working for funds under the table, your FICA pay-in is automatically deducted from your paycheck each week.
It is true that only two things in life are inevitable: Death and taxes.
Given the state of Social Security, it is essential that working adults make other plans to cover their expenses at retirement, or if (god forbid) something happens which prevents them from being able to work. There are a couple options:
- The 401k – This is a rolling contribution fund, provided by your employer, which you can pay pre-tax dollars into each year. There are a wide variety of these types of accounts and they can be rather confusing. What makes the 401k attractive is that you are contributing pre-tax dollars, you can grow the funds via interest, and in some situations your company may pay matching funds into your account for every contribution that you make. (Though, since the economy tanked in 2008, this is pretty rare.)
- The IRA (individual retirement account) – Again, a confusing entity, but one with tax advantages that allows you to diversify your investments under one blanket account. Disadvantages: Not everyone can use an IRA, there are restrictions and caps on what you can contribute each year and there are HUGE penalties if you pull your $$ out before your designated retirement age.
- Traditional savings accounts and other savings mechanisms – The plus is that these accounts are not just retirement accounts, but also “rainy day funds” – meaning, your money is available if you have a medical emergency or other unexpected expense, without penalty. The downsides? The money is available whenever you want or need it. You have to have immense discipline to keep your paws off that moolah. Also, savings accounts and other savings mechanisms (like T-Bills) have smaller interest rates and yield lower returns, overall.
Personally, I think that the foundation of saving for retirement should be a traditional, old fashioned savings account. My reasoning comes from personal experience, though my savings was meager, when I lost my posh tech job in the fall of 2008, had I not had access to those funds, I would have ended up homeless living in a box in a BART station. Granted, I also relied on unemployment and support from my family to get me through, but I started with my savings account. I think that you should only diversify into other retirement savings if you have a solid year’s income saved in a traditional passbook account that you haven’t had to touch for at least a year, for any reason. At that time, you’ve got a cushion and can afford to put money into vessels where you cannot immediately access it (or, lose money if you have to immediately access it).
As soon as you can start saving, in any form, you should. Ideally, you should start socking money away somewhere as soon as you start a full-time job post college or vocational training. But, it’s never too late to start, and even if you’re in your 30s or 40s, setting aside money for the future or an emergency is a good idea.
Granted, in cities like San Francisco and New York, that’s going to be a challenge. But, even if you’re only throwing $20/week into a savings account, something is better than nothing at all. Trust me, I’ve been there, done that and got the t-shirt.
Luckily for me, my shitty moneysense is balanced by my husband’s spendthrift nature. Otherwise, regardless of where I was living, I’d be up shit creek without a paddle. Or, living in a box with my two dogs outside Wrigley Field, instead of in a BART station. And, we have winter here. ‘Nuff said.
Got a question you need a grown up to answer? Email Kate at firstname.lastname@example.org and your question might be used in a future column!
[Image of Old Guy and Nurse via You And Me Magazine]
[Image of Gladys Burrill via UK Daily Mail and Associated Press]
[Death and Taxes cartoon via ConstantContact]