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How Has Social Security Changed Over The Years

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 9 minute read

Only change is guaranteed in this world. The pace at which retirement plans have evolved in recent years is startling.

There was no such thing as health insurance, Medicare, or Social Security a century ago. It wasn’t until the Internal Revenue Act of 1921 made pension payments tax-deductible for firms that pensions became popular in the private sector. Fifty years ago, retirement plans like the 401(k) and the individual retirement account (IRA) did not exist.

Planning for retirement has changed significantly, even in the past quarter century. Retirement planning’s “holy cows” and assumptions appear quite different now compared to only 25 years ago, and the financial environment will look even different in another 25 years.

Learn about the evolution of retirement over the past quarter century and what you should keep an eye on when you start putting away money for your own golden years.

Actual Social Security Benefits Have Fallen

An annual cost-of-living increase (COLA) of 7.7 percent was granted by the Social Security Administration (SSA) from 1975 and 1984, which was above the rate of inflation. An astounding 14.3 percent was the greatest yearly growth rate.

Recent events have altered the status quo. The average cost-of-living adjustment (COLA) in the 12 years from 2009 to 2020 was a meager 1.38%, and in three of those years there was no COLA at all. According to research conducted by The Senior Citizens League, this means that retirees would see a 30% drop in their purchasing power due to Social Security payments between the years of 2000 and 2020.

Why is Uncle Sam being so stingy now? Because it is common knowledge that Social Security will soon be bankrupt. The money is being lost right now, not in some abstract “trouble for another day” way. The Social Security Administration predicted in 2016 that expenditures will exceed income by 2020. Just two years later, the Social Security Administration (SSA) recognized that spending exceeded revenue.

Based on their projections, they predict that the company would go bankrupt in the year 2034. Nobody can predict what Washington will do about this political and budgetary disaster.

The impact on your retirement savings is less contentious. When the time comes for retirement, don’t count on Social Security to save the day. Since Social Security is expected to continue declining, you should plan to pay for your own retirement out of pocket.

Employers are shifting away from pensions and toward contribution accounts.

There was a far larger pension population only 25 years ago. Defined contribution plans, such as 401(k)s and 403(b)s, have largely replaced defined benefit plans, commonly referred to as pensions, over the past half century. Instead than promising to pay workers a certain amount every month for the rest of their lives, businesses in these plans instead pledge to put away a set amount of money each month for their retirement.

On top of that, it’s become common practice for preexisting pension plans to offer buyouts to beneficiaries in order to avoid the obligation of making future payments. It’s part of a growing movement known as “de-risking,” in which pension funds instead of making lifelong payouts to workers offer them a lump sum in exchange for their resignation.

The Pension Benefit Guaranty Corporation reports that 86% of pension sponsors are actively working to de-risk their plans.

There is no need to panic about de-risking for retirees or the erosion of pensions for millennials. The development of the gig economy, however, means that many younger employees don’t have access to a defined contribution account (more on that below). In the event that a company does not provide a 401(k) or similar defined-benefit plan, employees are still eligible to contribute the maximum to an individual retirement account.

SEP IRAs, with its greater contribution limitations, are available to self-employed workers, including those classified as 1099 employees.

The Gig Economy’s Rise (and the Fall of Retirement Benefits)

A 2017 Pew survey found that an alarming 41% of working-age millennials do not have access to any sort of employer-sponsored retirement plan. The report continued by pointing out that just 31% of working millennials enrolled in an employer retirement plan, even though many of them had access to such a plan.

The growth of the “gig economy” and the prevalence of contract workers who are paid via the “1099 system” rather than the “W-2 system” contribute to this lack of availability. One in five people now employed are in 1099 employment as opposed to W-2 benefitted positions, according to a study conducted by NPR and Marist in 2018. Approximately one-third of U.S. adults (36%) are part of the “gig economy,” according to a 2018 Gallup survey.

Don’t get me wrong – I have the utmost admiration for those who manage to create and run their own businesses on top of their day jobs. Safe withdrawal rates, sequence risk, and other difficulties in retirement planning and saving are foreign ideas to the majority of Americans who do not have access to an employer-sponsored retirement plan.

So, it’s fair to wonder if the average American has risen to the task of preparing for their own retirement. The data suggests that a sizable percentage of them have not.

Americans do not save nearly enough on their own.

The dismal data on people’s ability to save for retirement might fill a horror collection. According to Inc. Magazine, one in three American workers has no retirement savings at all. According to research conducted by Comet Financial Intelligence, about half of all baby boomers had no money set up for old age. Seventy percent of boomers, according to research by the Insured Retirement Institute, have less than $5,000 stashed up for old age. 

Now is the time for sobbing and gnashing of teeth. While the figures and statistics may differ, they all present a similar picture: many Americans aren’t financially literate or disciplined enough to save enough for retirement on their own. Financial education is not a mandatory subject in the United States.

No one should be surprised that most Americans lack the knowledge and skills necessary to plan for and achieve economic autonomy on their own.

So, now what? Boost your savings rate by using an automatic savings tool, such as Acorns or Digit, to take the discipline and willpower out of saving. Instead of paying retirement savings out of whatever funds are left in your bank account at the end of the month, consider making these payments the very first “cost” you pay from each paycheck.

Keeping a record of your wealth may be an excellent source of inspiration and knowledge. Use a tool like Personal Capital or Mint to track your financial situation and see your wealth grow month after month.

Americans are living longer lives.

The World Bank’s most current statistics (2018) shows that the average American life expectancy was 78.5. In 1991, twenty-five years earlier, life expectancies in the United States were three years lower, at 75. That’s an additional layer to the retirement planning financial crisis in the United States.

Keep in mind that your future Social Security check may be less. Defined contribution plans are replacing traditional pensions. Older employees are inadequately unprepared for retirement, and many Americans lack access to such programs.

It’s puzzling how the United States as a whole will be able to afford longer life spans if its citizens can’t save enough money or retire comfortably.

Health-care costs have risen dramatically.

The steadily increasing price of medical treatment is a well-documented phenomenon, as well as an evident one to everyone who has to foot the bill. Health care spending per person in the United States increased from $5,187 in 1992 to $11,172 in 2018, according to the Centers for Medicare and Medicaid Services (CMS).

And the price isn’t going down anytime soon. According to a 2018 analysis by HealthView Services, the average cost of healthcare for a 65-year-old couple, excluding long-term care, is $537,334. For the typical American marriage, it translates to roughly half a million dollars in healthcare bills in the future.

A quarter of a century later, seniors’ health care concerns are far bigger than they were then. There is a growing trend of retirees having to fend for themselves in terms of investigating health insurance alternatives, locating methods to save money on health care, and planning for future protection against rising medical expenditures.

Prescription Drug Coverage under Medicare Part D is now available.

Legislation was enacted in 2003 expanding Medicare prescription medication coverage choices under the Medicare Prescription Drug, Improvement, and Modernization Act. 

Medicare Part D coverage plans, which are where the alterations first took effect in 2006, are the ones to blame. Retirees can pay a monthly fee into a private sector plan approved by Medicare and receive discounts on prescription drugs.

It’s one of the new ways senior citizens may save money on expensive medications. But extra choices are only helpful if they are digestible, so don’t be afraid to seek clarification if you get stuck. Prescription medication discount cards and other low-cost alternatives should be explored before settling on a pricey plan.

Medicare Advantage Plans are on the Rise

“Medicare Advantage” plans, often known as “Part C” plans, are private but regulated Medicare plans that offer supplemental coverage similar to Medicare Part D plans. For an additional price, these plans provide more coverage than standard Medicare does, including for things like vision and dental care, leading to the common description of “all-in-one” Medicare coverage.

The Medicare Advantage program, also known as Medicare Part C, was established in the mid-1990s and has since expanded in scope and popularity. Get all the facts and talk to an insurance professional before enrolling in a more expensive Medicare Advantage plan.

Americans are retiring later in life.

Courtney Coile of Wellesley College studied data from the Current Population Survey and demonstrated that in 1990, just 38% of 62- to 64-year-olds were working. By 2017, Bloomberg estimates, that number had jumped to 53 percent. Similar to how in 1997 the majority of males (57%) began collecting Social Security at the earliest possible age of 62. This proportion had reduced to one-third of males by 2017.

Americans need to work longer because of the erosion of the purchase value of their Social Security payments, the elimination of pensions, and the increasing longevity of the country’s workforce. What many Americans don’t know is that they don’t always have a choice in the issue.

A research by ProPublica and the Urban Institute across many decades revealed that 56% of elderly workers had been driven out of their employment by their employers. Another 9% were compelled to retire for personal reasons, such as health failure.

Due to your increased longevity, you now have to devote more time to your career. It makes sense on paper. However, while planning your retirement plans, you shouldn’t bank on having complete control over your retirement date. Instead, you should take measures to safeguard your career and employment in order to reduce the likelihood of being forced to retire before you’re ready.

The Rise of the Roth IRA

Twenty-five years ago, people did not have access to Roth IRAs. They were first made available to the public in the Tax Relief Act of 1997, allowing citizens to claim a refund on taxes previously paid on their retirement savings. 

The money you put into a conventional IRA or 401(k) this year is exempt from taxes, but any earnings you take out in retirement will be subject to income taxation at your marginal rate. Contributions to a Roth IRA or Roth 401(k) are taxed now but withdrawals are tax-free in retirement.

Particularly for younger, lower-income folks, it’s a great alternative. One additional benefit of Roth accounts is that they may be used to cover the cost of higher education for a child. In fact, first-time homebuyers can utilize tax-free assets from a Roth IRA account toward a down payment.

You can open a Roth IRA using a service like Betterment if you don’t already have one.

Investors Are More Cost-Aware

Historically, mutual fund managers have been able to rake in huge profits by charging exorbitant cost ratios. In reality, many investors never looked at individual mutual fund management costs 25 years ago since most trades were handled by a money manager. 

Nowadays, investors may open a brokerage account online in under a minute and examine the cost ratios for each fund with their own eyes. It’s hardly surprising that investors are fleeing funds with exorbitant management costs. The Investment Company Institute reports that typical ETF fee ratios fell by 32% from 2009 to 2016.

A growing number of investors prefer passive index funds over actively managed funds, and rising knowledge of the importance of management costs is a major factor in this shift. It also shows that American investors are becoming more savvy as they are being asked to shoulder more of the burden of retirement savings. In truth, the current market doesn’t provide too many.

Bottom Line

A comfortable retirement “ain’t what it used to be.” There has been a decrease in pension and Social Security payouts. Increasingly, individuals in the United States are responsible for securing their own retirement funds and making their own retirement plans. It’s up to you to calculate how much money you’ll need saved and invested in order to retire comfortably.

The good news is that more resources exist than ever before to assist you in making investments and even automate your retirement savings. Robo-advisors can automatically rebalance and adjust your portfolio’s asset allocation for you. Apps like Chime make it easy to save regularly for retirement without thinking about it.

Take charge of your financial future and start saving for retirement now. Someone else won’t do it for you, that’s for sure.

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