My Golden Years

• The first American to receive a monthly Social Security check was Ida May Fuller. She paid $24.75 into the system after three years of payroll taxes but received $22,888.92 between retirement at 65 and her death at 100 years old.
• Currently, two 56-year-olds with average earnings will pay about $140,000 in dedicated Medicare taxes over their lifetimes but will receive about $430,000 in benefits following retirement.
• Social Security is largely a pay-as-you-go system in which the current taxes of the working pay for the benefits for the retired. The system’s “support ratio,” which measures the number of people of working age over the number of people beyond retirement age, has decreased from 5.3 in 1970 to 4.6 in 2010 and is forecasted to fall to 2.6 by 2050.
• The life expectancy of 65-year-old males in the U.S. has improved by about 5 years since 1970, though people on average are retiring one year earlier.
• Spending on health care programs and Social Security is projected to grow from roughly 10% of GDP today to 16% of GDP by 2035. By comparison, spending on all of the federal government’s programs and activities, excluding interest on debt, has averaged 18.5% of GDP over the past 40 years.

There is a lot of data and research on our country’s entitlement programs, but these are some of the facts that have stood out. Considering my progressive mindset, I believe in the intent of these programs. But these facts paint a picture showing how they are systematically unsustainable and how, with the baby boomer generation moving into retirement, they could eventually bend and break this country’s bank. I don’t purport to know the answers to this highly complicated problem. Despite the theatrics of last week, I hope our government will eventually figure something out that extends beyond red vs. blue. Representative Paul Ryan’s 2012 budget proposal, while imperfect, is at least a clue that some people in congress are taking it seriously. But to me, this national discourse raises one very important question: who is responsible for my retirement?

In the agricultural age, there really was no “retirement.” You had as many kids as you could to help the family farm and worked in the fields until you dropped. With the advent of the industrial revolution, people moved to the cities and began working in factories. This was fine and dandy until 1929, when the Great Depression put 25% of the country out of work and washed out any savings. In response, President Franklin Delano Roosevelt signed the Social Security Act in 1935, the most influential social safety net that changed the way people thought about their future. Retirement was now the government’s responsibility.

This mentality continued in the middle part of the century. As the U.S. economy boomed following WWII, the “American Dream” was born: a house, two cars, and a steady job. Auto manufacturers kept labor costs low by including in current benefits the assurance of a pension. Other manufacturers followed suit by offering these “defined-benefit” plans, in which retirement payouts are defined and legally promised. Responsibility was now put on employers as well. With President Lyndon Johnson’s signing of the Social Security Act of 1965, which included Medicare, we added to the government’s list of responsibilities the burden of retiree health care. As these programs are supported by current workers and tax payers, the looming liabilities they created were hidden by the bull markets of the 1980’s and 1990’s.

With the bursting of the tech bubble in 2000 and later the housing market in 2007, the assets backing the pension plans fell dramatically, exposing employers to considerable net liabilities. General Motors eventually claimed bankruptcy, in part due to the mammoth burden it owes to retired pensioners. As unemployment remains high and retirees live longer, there are fewer workers to support the outgoing pension and social security checks. For these reasons, most employers now offer “defined-contribution” plans like a 401(k), which offers matching contributions (~4% of salary, for example) but puts the investment decisions and, ultimately, the risk in the hands of the employee. Responsibility has now shifted back to the individual.

My first memory of any real savings beyond a piggy bank was a kid-targeted savings account at the local bank in Barrington. At the time, there was no internet banking. Or there might have been, but we didn’t have the internet yet. My sisters and I had these little blue ledger books that resembled a passport. Upon receiving money for birthdays and holidays or for any chores I did around the house, we would go to the bank and give the teller our books and a deposit slip. She would then use a special printer to mark the deposit and our resulting balance. While I understood that I was doing a good thing, whenever I got that book back with some lines added to it, I couldn’t help but feel I would have rather had a video game. At least the bank always had fresh cookies by the door.

The savings account grew at a pace one would expect for a 9 year old. That is, until my Grandpa died. My Gramma, who doesn’t drive, had to sell their car. The money was split up amongst my sisters and me, which resulted in a $3,000 increase to my account. Compared to my stash at the time and based upon my familiarity with money, this experience taught me three things: I was getting gypped on my birthday and Christmas, I was being grossly underpaid for my chores, and my Gramma was the richest woman in the world.

I don’t have that account anymore. Instead I have a 401(k), a Roth IRA, a Certificate of Deposit, a brokerage account, and a savings account. These are admittedly more complicated than those humble beginnings in Barrington, but the underlying purpose is the same: to live below my means. My parents instilled in me from an early age the crucial importance of saving for the future, whether it’s for a major purchase, specific event, emergency, or simply to use in my golden years. That money I saved as a kid and Gramma’s car money is sitting somewhere, and I will happily use it towards business school in the fall or maybe someday an engagement ring. Much better choices than a video game.

Now, I don’t know what is going to happen with Social Security or Medicare or any of the other federal entitlement programs. Social Security is called the political “third-rail” for a reason. Any efforts to mess with it and you’ll be zapped out of a job by voters. It’s tough to ask people to give up the better end of a deal. I for one hope that my benefits are cut or the retirement age is raised so that the system is brought into saner pastures. If not, then my problems (and my children’s) will far outweigh what my Social Security checks amount to every month. But one thing is certainly clear: my retirement is my responsibility.

That is, unless Gramma has any Ferraris I don’t know about.