What millennials need to do today to avoid Social Security problems later

Millennials and Social Security

by Gary Foreman

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Let me start with a confession. I'm not a millennial. I'm a baby boomer. Been working since I was 15. For over 40 years I've been paying into Social Security. In return for my hard-earned money I've received promises about future payments. And, I'm not alone. The Population Reference Bureau says that there are 76 million of us boomers


"Social Security is not in imminent danger of running out of money, but it faces a financial crunch a bit further out - around 2035. That is when Social Security's Trust Fund is projected to be exhausted due to the drawdown of benefits by the baby boom generation. At that point, the program would have sufficient tax revenue to pay only about 76 percent of promised benefits."

- cut benefits that were promised to seniors
- increase social security taxes on younger workers
- shift funding (and the problem) to the general U.S. budget (which will lead to deficit spending and inflation)

I'll leave it up to you whether you should contact the President, your senators or representatives and suggest that they work on a solution now. But, given the fact that we haven't even seen a serious proposal in years, it's probably safe to assume that they won't take any action in the near term that would close the gap between promises and expected revenues.


First, save as much as you can today. Don't assume that it'll be easier to save ten years from now when you're making more money. If tax rates go up that might not be true. Or if inflation is consuming your paycheck it will be harder to save.

So save all you can today. Aim to save at least 10% of your take-home pay. Better still 15%. Not only will you be establishing the savings habit early, you'll also have the magic of compound interest working in your favor. A dollar saved today is worth about twice as much as one saved 10 years from now.

Then guard your savings carefully. There are two major threats to your savings: taxes and inflation. Let's look at each one separately.

First, taxes. Taxes can play a major role in the performance of any long term savings plan. The reason is simple. Taxes slow down the benefits of compound interest.

Let's take an example. Let's suppose that your money is earning a steady 8% per year. At that rate it will double every 9 years. Pretend you're 23 years old today and received $1 as a birthday present. You save it for retirement. That $1 will double when you're 32 ($2). Again when you're 41 ($4). Again when you're 50 ($8). Again when you're 59 ($16). Again when you're 66 ($32). And again when you're 75 ($64).

Now let's suppose that taxes take 25% of your earnings each year. So your $1 birthday gift only earns 6% each year. Now it will double every 12 years. So it will double when you're 35 ($2). And double again when you're 47 ($4). And again when you're 59 ($8). And again when you're 71 ($16).


Another way to avoid taxes is to buy and hold investments that don't pay interest or dividends, but increase in value over time. Income and dividends are taxed as ordinary income. But an increase in value is considered a capital gain and taxed at a lower rate (assuming that Congress doesn't raise the capital gains rate). Plus, the gains are only taxed at the time you sell the investment, not each year as it appreciates.

The second main threat to your savings is inflation. And, there's good reason to think that we'll see more inflation in the future, in part because of government deficits. Inflation allows a borrower to repay a debt with dollars that are worth less. And, government has the ability to print dollars that cause inflation. So you don't have to be a conspiracy nut to think that there's a good chance that we'll see some inflation fairly soon.

If you're working inflation isn't so bad. Prices go up. Your wages go up. No harm done. But, if you're a saver that's different. Inflation is like a tax on savings. Every rise in prices means that your savings buy less.


Consider something called an "asset allocation model" when you invest your savings. It's a balanced approach. The design is such that if economic events are bad for one type of invesment they're also good for a different type. So you don't hit home runs, but you don't strike out either. Long-term it's the safest way to invest.



Gary Foreman


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