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The $812K Question: Will Social Security Be Around in 2045?

Well, OK. $812,450. That’s what Social Security means to me, roughly.

Why? Well, I’m in a saving mindset these days. I’ve saved money over the years for many personal goals – a new computer, a vacation, and yes, even a first home. I also started saving for my retirement quite early, at the age of 20. Now, with two children, you also can add college to the mix of savings goals.

So, it’s ironic that this week I received my annual “Social Security” statement from the US Government. Unfortunately, it really doesn’t answer the fundamental question I have about the program – can/should I count on it, or not? This article came out today on the Vanguard feed, and it got me thinking about the issue.

Based on the best web sources I can dig up, it looks like I’m due $32,498 in 2045, the first year I’m going to be eligible for full benefits. That’s in 2005 dollars – with inflation, the nominal amount will be much more. However, using 2005 dollars makes it easier to place the value in the here & now.

When you think about retiring, you have to think about how to live off your assets. In a funny way, you are basically “endowing” yourself, much as the wealthy will endow tenured chairs at universities, or even departments. A typical endowment, like Harvard’s, will limit withdrawals to 4% a year, to ensure that they will never run out of money. They’ve been around more than 350 years, so it’s likely they know what they are doing.

I use the 4% rule myself when thinking about generating income from assets, safely, on an ongoing basis. It makes it very easy to figure out how much money you might need to retire, for example. Just take the annual income you want, and multiply by 25. Simple.

So, if you want $100K per year, in today’s dollars, you would need $2.5M invested, in today’s dollars. Simple, but sobering.

$32,498 per year may not sound like a wealthy income level, but it’s the maximum the US Government provides as part of the current Social Security program. Using the rule of 25, you’d have to have $812,450 saved up in your 401K to provide the same for yourself.

Scary number, given the fact that the average 55-year old has less than $50K saved in their 401K plan. Hopefully, our generation will be better about individual responsibility and saving than the previous generation, but I’m not sure I’ve found any economic statistic that actually suggests that.

I have never personally put much faith in the current incarnation of the Social Security program being around for me in 2045. In the late 1980s, I remember researching policy debate topics around retirement in high school, and the overwhelming evidence that the current system is not solvent, and will not last to the middle of the 21st century. In a funny way, it’s a curse of our own success. Social Security is an insurance program, and it was implicitly a bet that economic productivity growth would match or surpass the expected length of retirement (based on longevity).

Productivity growth in the US over the last 70 years has been spectacular. Unbelievable. That’s why we are sitting on a $12 Trillion economy. However, when Social Security was born in the 1930s, longevity was expected to be in the mid 1960s, so most people were not expected to collect from the program, and those that did would only collect for a short while.

Now, we live in a society where more than 50% of people who live to 80 can expect to live to 90. Think about it – 65 to 90 is 25 years. There are still many jobs where 25 years is considered full service, and grants you title to a complete pension. Amazing.

I’m a technology optimist. I believe that we’re likely to unlock longevity measuring into the mid-100s during my lifetime. But what does that mean for programs like Social Security, or even for retirement itself?

In any case, I now realize that for my personal financial planning, my opinion of whether I believe in Social Security or not has a real practical implication for my personal saving. $812,450 is a lot of money to save on your own.

Then again, maybe it would be easier to save that over a working lifetime if 12.4% of your salary didn’t go missing every paycheck.

I think I’m still going to base my planning on the assumption that Social Security won’t be around in its current form in 2045. I always like to leave some upside in my planning anyway.

4 Comments Post a comment
  1. Doesn’t your 4% rule imply that you’ll never die? Or at least, it prepares for the possibility. Even if you assume you die at 150, that should greatly reduce the amount you need to save.

    November 3, 2006
  2. Yes, it’s a very conservative estimate. It basically says I can’t predict when I am going to die, and I don’t want to take any risk that I will run out of money before I die.

    There are far more sophisticated methods to attempt to plan out withdrawals, asset class mix, and life expectancy to boost your withdrawal rate. However, they all include some amount of risk that you will actually run out of money before you die.

    I’ve heard some people adjust their withdrawal rate up to 5% to account for this. But I think you’ll find in most personal finance journals they always tend to recommend 4-5% as the maximum you can “rely on” without depleting your funds early.

    November 3, 2006
  3. Bill Woessner #

    This isn’t particularly insightful, but it’s another way of looking at things. You can also view the rule of 25 as an extremely aggressive rule with a 50% safety margin. Suppose you put all your assets in an S&P 500 index fund. The next day, the market crashes. You lose 50% of your assets. Assuming your investment resumes its historical return, how much of your original amount can you withdraw?

    I = P(exp(r) – 1)

    where I is the annual interest, P is the principal amount and r is the annual rate of reutrn. Since you lost half your original amount, we’ll use P = 1/2. The historical return of the S&P 500 is 7.7% after inflation.

    I = (exp(7.7%) – 1) / 2 = 4%

    Oualla! The rule of 25.

    BTW, I don’t think you should count on Social Security being around in 2045.

    November 3, 2006
  4. I get ssi and ssdi. I would like to know if these programs will be around forvever?

    Please e-mail me at tomp1253@msn.com

    July 6, 2008

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