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Obama Faces Social Security Crisis

Many don’t realize that Social Security COLA adjustments are pegged to the inflation rate. The average annual inflation rate for the past 20 years or so is ~2%, which means that those who depend on Social Security as part of their livelihood could count on a decent raise in what they received from the government each year. However, this year we are facing an actual negative inflation rate due to the economy. So, while their payments can’t go down, seniors will still feel the hurt.

As one could imagine, if you combine this hit with the hit that most have taken from the decline in the stock market, seniors are facing a crisis like they’ve never seen before.

About 50 million retired and disabled Americans receive Social Security benefits. The average monthly benefit for retirees is $1,153 this year. All beneficiaries received a 5.8 percent increase in January, the largest since 1982.

More than 32 million people are in the Medicare prescription drug program. Average monthly premiums are set to go from $28 this year to $30 next year, though they vary by plan. About 6 million people in the program have premiums deducted from their monthly Social Security payments, according to the Social Security Administration.

Millions of people with Medicare Part B coverage for doctors’ visits also have their premiums deducted from Social Security payments. Part B premiums are expected to rise as well. But under the law, the increase cannot be larger than the increase in Social Security benefits for most recipients.

Some have claimed that Social Security is the most important government program ever passed in this country and that without it, millions of Americans would live in poverty like situations. While this may be true, and I truly do believe in supporting our elderly and the indigent to a certain extent, one clear lesson to take away from this news is that we cannot and should not count on the government to provide for our retirement. While 401Ks are not the answer to everything, it is clear that it is probably the most important step that you can take to provide for yourself when you retire. Albert Einstein said that “the most powerful force in the Universe is compound interest.” Combine with the fact that most companies will match a certain percentage of your contribution (it’s free money) if you are not taking advantage you are really hurting yourself. So, while Social Security payments may be going down, this is a poignant reminder of how important it is to invest and to do so wisely in a widely diversified fund. Otherwise you’ll end up relying on the government’s teat and economic times like this will be particularly tough.