Social Security is on pace to exhaust its reserves by 2033. And
while it may seem like a long way off, it's not.
Today, 56 million Americans rely on Social Security and they
receive an average monthly check of $1,125. Sadly, this monthly sum
is the only source of income for the vast majority.
Why is Social Security in trouble? And what does it mean for
people who require a stable source of income?
Social Security = Social Insecurity
Contrary to popular opinion, Social Security was not created
because of public demand. "It was sold by the slickest devices of
Madison Avenue," stated Milton Friedman, a Nobel Prize winning
economist.
The very language behind Social Security is misleading. For
instance, the payments that Social Security recipients receive are
commonly referred to as "benefits," but the truth is they are
subsidies. Here's what's occurring: Younger tax payers, via Social
Security taxes, are subsidizing the payments received by
retirees.
In recent years, the instability of Social Security has become
news.
On July 28, 2012, the Social Security system celebrated 75-years
of mis-management. As politicians celebrated on the House Steps of
the Capitol and bragged about the financial soundness of the
System, there was no mention of another important milestone
achieved by Social Security: It now pays out more in benefits than
it receives in payroll taxes.
The "Early Claimers"
Another element of the Social Security income deficit problem is
the "early claimers." These are the people who have been forced to
collect their Social Security benefits sooner than planned. Most of
the early claimers are retirement age but are either unemployed or
work part-time. Others have completely exhausted their
savings.
The Center for Retirement Research at Boston College estimates
that early claimers experienced a 4.6% decline in benefits or a
monthly reduction of Social Security benefit checks by $56. While a
4.6% decline might not seem like much, it's a lot to be losing for
income strapped people with no other significant source of
income.
Hurt by Low Rates
The Federal Reserve Bank's low interest rates have contributed to
the problem facing Social Security recipients. The other part of
their income source - the money they've invested in dividend paying
stocks (NYSEArca: DVY), Treasury bonds (NYSEArca: TLT), and
corporate bonds (NYSEArca: LQD) isn't generating enough cash
flow.
As a result of low rates, the Fed has forced income savers to
take greater risks with their money. Previously risk averse
investors, have now been piling into high risk areas like junk
bonds (NYSEArca: HYG), master limited partnerships (NYSEArca: AMLP)
and even emerging market debt (NYSEArca: PCY).
Attacking the Problem
The March 2012 edition of the ETF Profit Strategy Newsletter said,
"None of the traditional income (including Social Security) methods
are helping people to overcome their income shortfall. And other
methods like buying longer-dated bonds or high yielding stocks come
with their own set of problems."
Instead of relying on the instability of Social Security, smart
investors are already creating alternativesources of income.
People, especially those ages 46 or younger, should no longer be
factoring in Social Security payments into their retirement
plan.
Over the past three months, the ETF strategies in the
ETF
Profit Strategy Newsletter
have produced just over $3,000 of cash flow income. To get that
sort of cash flow, a person with a hypothetical $100,000 investment
account would have to lock away their money in a one-year bank CD
for three excruciating years.