As if it isn’t bad enough that most retirement portfolios are still down significantly from their levels a year or two ago … that housing wealth has been evaporated in towns across the country … and that near-zero interest rates are punishing responsible savers … Washington recently issued another piece of official bad news — Social Security recipients won’t be getting one single penny in cost-of-living increases next year.
The news wasn’t entirely a surprise. And, sure, President Obama has asked Congress to send out another one-time payment of $250 to more than 50 million seniors as a little relief (emphasis on “little”).
But whatever way you slice it, this Social Security snafu highlights two simple facts that we all need to recognize, no matter what stage of life we’re in …
First, the Social Security system is flawed on MANY levels.
Second, we should only depend on our private investments to truly sustain us in our golden years.
I’ll talk more about two steps you can take for higher income in a moment. First, let’s start with my initial assertion …
Four Reasons Social Security Is Completely Flawed
Reason #1: A pay-as-you-go structure. I’ve talked about it before, but it’s worth repeating … Social Security’s pay-as-you-go structure is essentially a giant ponzi scheme.
Ostensibly, we’re all paying into our “own” retirement futures every time money gets siphoned out of our paychecks and into the government kitty.
But realistically, our future payments depend on future workers. And that means something has to expand indefinitely — either the workforce or the tax rate. Otherwise, future benefits are going to have to shrink in some way, shape, or form.
Reason #2: Rising life expectancies. Don’t get me wrong … I’m glad we all stand a good chance of living longer, healthier, more productive lives than the generations of yore. But the side effect for Social Security is additional strain.
Remember, Social Security was designed in the 1930s, when people lived to an average age of 60. Today, the average American is hitting 76!
The end result is another strike against the system’s ability to pay out promised benefits to millions of Americans based on current inflows.
Reason #3: A markedly expanded coverage universe. When Social Security started, it covered about half of the U.S. population. Entire swaths of workers were not promised benefits.
But today, nearly all workers are covered by the program. In the event of injury, they usually qualify for disability. In the event of their death, their spouses — and possibly their children — receive benefits.
Plus, as one reader pointed out on my blog a few months ago:
“Please go to the federal budget for 2008, look at the social security section, and see for yourself that SS going broke has less to do with seniors collecting benefits, and more to do with people UNDER retirement benefit age collecting money each month.
“Examples of programs include; payments to unwed mothers, WIC program, disability benefits to anyone at any age for most any injury, funding for drug treatment centers, tuition dollars for re-training workers, the list goes on and on. Don’t misunderstand, these are great programs, but they don’t belong under SS.”
His point is well taken. There’s no question that many of Social Security’s expanded responsibilities help Americans who are down on their luck. But this broader coverage also comes with a huge price tag and adds to an already struggling system.
|Retirees are rightfully angry about Social Security’s inability to hand them realistic cost-of-living increases.|
Reason #4: Skewed cost-of-living adjustments. Since 1950, Social Security has adjusted recipients’ checks for inflation. The current method, adopted in 1972, uses the change in Consumer Price Index (CPI) from July through September vs. the same period a year earlier.
Let’s ignore the fact that it doesn’t compare a complete year, which is a flaw in and of itself as far as I’m concerned.
Instead, let’s focus on the fact that the CPI itself is an imperfect indicator of the inflation that you and I feel in our daily lives.
I covered this topic in depth back in June of 2008, so I think a few simple questions will make my point today …
Has your food gotten any cheaper in the last year? How about your healthcare costs? And sure, gas dipped temporarily, but what are you paying now? Is it significantly less than you were paying over the last couple years?
Heck, consider this: Social Security’s biggest COLA since 1982 came last year, with a 5.8 percent boost. The few preceding years saw adjustments of 2.3 percent (2008), 3.3 percent (2007), and 4.1 percent (2006).
Meanwhile, the Kaiser Foundation says health insurance premiums for families have risen 131 percent since 1999 more than FOUR TIMES the general rate of inflation over the same period (28 percent).
So the fact that retirees aren’t getting any raise this year is just a more extreme example of the less-than-accurate adjustments they’ve been getting every year.
I could go on and on about Social Security’s shortcomings. But let’s just get to the main point, one that is stated quite plainly on the official Social Security website …
“Social Security Was Never Meant to Be
The Sole Source of Income in Retirement.”
In Other Words: You Must Rely on Your Own Investments!
We’re on our own when it comes to building and maintaining a solid retirement nest egg … one that can hand us steady income through thick and thin … and continue to grow your cash flow faster than the true rate of your own costs.
So how can you do that?
Certainly not with CDs or money market funds, given the pitifully low interest rates right now.
Instead, I have a couple suggestions:
First, stick with solid dividend stocks that have a long history of rising payments. It’s no secret that I favor these kinds of investments in my Dividend Superstars newsletter.
These companies tend to hold up very well during market downdrafts, post solid capital gains over time, and can continue to provide you with greater income year in and year out.
Second, also consider balancing your income-producing stocks with a solid mix of bonds. Not only will you get much needed diversification, but by selecting carefully, you can also get very solid yields with relatively moderate risk.
And don’t just stick to bonds here in the U.S., either! Remember that there are plenty of foreign companies and governments that are also competing for investment dollars by offering very attractive interest rates right now.
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