Social Security
Everyone has heard about the Great Depression. The stock market bust, rising unemployment, the soup lines, the Dust Bowl. The age when capitalism looked to have failed and various countries were experimenting with collectivist approaches. U.S. hasn’t been immune to these influences either, and that’s how the pillar of today’s retirement planning came about. In 1935, Social Security has been established, guaranteeing a regular income stream upon reaching a certain age. It looked elegant and has worked nicely.
It has reflected the U.S. demographic profile and life expectancy of that era. But societies age and medical advances make for longer living. The ratio of contributors to contributees to the system has been undergoing dramatic changes over the recent decades, calling some to question Social Security’s viability in its present form unless adjustments are made. And we have seen quite a few of them already. Do you remember that Social Security income used to be tax-free? Do you remember the file and suspend strategy that ceased to be permitted earlier this decade? Means-testing is probably coming sometime in the future. These are not cosmetic changes and you better pay attention as Social Security income is the largest retirement financial asset of far too many Americans.
Some would even half-jokingly ask you what would you call the organization that generates returns for older investors by acquiring new investors, who are promised a large profit at little to no risk? The pyramid scheme, or the Ponzi scheme, or the… Social Security!
What is it? It is the informal term used for the Old-Age, Survivors, and Disability Insurance program in the United States, run by the federal agency called Social Security Administration. While best known for retirement benefits, it also provides disability income and survivor benefits.
How does it work? Social Security is generally a pay-as-you-go program. This means that present workers pay Social Security taxes into the program and money flows back out as monthly income to beneficiaries. As you can see, the idea is surprisingly similar to the Ponzi scheme. Workers pay taxes, or contributions, which are not saved and invested, but almost immediately transferred to pensioners as retirement benefits. Then, the present workers’ retirements benefits will be funded by the future workers’ taxes, and so on. The only difference is that the Social Security is legal and guaranteed by the state. Its Trust Fund is stuffed full of Treasuries. The system works perfectly fine as long as enough new participants join the system. However, the Western societies, and the U.S. is not exception here, are ageing, which means that fewer active workers will be supporting a progressively greater numbers of retirees. 10,000 Baby Boomers are reaching retirement age every day. As one can see in the chart below, the share of the population aged 65 and above increased from 9 percent in 1960 to more than 15 percent in 2017 (in other countries, this share is even higher).
Chart 1: US population aged 65 and above as a percentage of the total population from 1960 to 2017.
Social Security and Gold
And this is when gold enters the scene. With the ageing U.S. population, the viability of the Social Security is under threat. The system is fundamentally unbalanced, as taxes from the workers will not be enough to pay 100 percent benefits to retirees. It is estimated thus that the retirement fund’s reserves will become depleted by 2035. Since then, the Congress will be forced to cover the gap. Surely, the politicians could come up with new tricks and kick the can down the road. However, the long-term consequences of unsound economic policies are inexorable and the day of reckoning will eventually arrive. Which means that the promises that have been made, will be impossible to meet.
What will happen? There are only three ways to balance the system: higher taxes on workers, lower benefits or higher requirement age threshold. It means that your future situation will deteriorate if you do not take the right steps right now. You will have to either pay more money in taxes and enjoy lower disposable incomes, or work more years. And when you eventually retire, you will probably get lower benefits (of course, the elderly can outvote the young to support the benefits, but the system will break one day under the weight of higher taxes imposed on fewer workers).
This is why saving for retirement on your own is a prudent decision. You could boost the value of your retirement portfolio and diversify its risk that way. And guess what is a great addition to the portfolio? You guessed it! Gold. No, we are not saying that you should allocate 100 percent of your wealth into the precious metals, but more than a few percent of it in gold will work marvels. You can even invest in gold in your own retirement plan. Take a look at our go-to resource as boosting your financial security this way has become much easier than it used to be. Remember, gold is a traditional safe-haven asset and an inflation hedge. It will help protect your retirement capital from abrupt inflation or financial crisis, and provide you with an insurance against other tail risks.