Social Security Armageddon

A friend recently sent me a link to an article about the precarity of the US Social Security system. The headlines read:

Social Security’s Finances Erode Further, Risking Benefit Cuts

The nation’s key program for retiree benefits continues to see financing shortfalls. Unless Congress acts, those drops could lead to payment cuts in eight years. [NYT 6/18/25]

Photo courtesy Pixabay

Of course it scared her. She noted: “Not good news for us old folks.” I had to respond: The solution is either to find remedies or go broke. 

I am not as worried as my friend. I don’t think any politician will be willing to reduce payments to current seniors receiving benefits or to those soon to receive benefits. That would be suicide. (Voter participation by age; Voters by age group Table 1) 

On the other hand, I do hope that eventually (actually sooner rather than later) our legislators will have enough sense to do one or more of the following (and it will need more than one): 

1. Raise the retirement age for most categories of older workers except a few that work in jobs that are physically demanding; and do it for generations down the line, not the ones coming up to retirement age in five years. This is in order not to penalize those who are counting on benefits soon, and to insure that the younger ones will have time to prepare themselves or find a source of help. 
2. Reduce the payments for more wealthy seniors.
3. Increase the threshold for taxation of higher salaries.
4. Find ways to get people to put more in their 401(k)s.
5. Enlarge the 401(k) and other retirement programs, or create new types of portable or individual retirement savings accounts for people who don’t have them through their employer.
6. Teach people at a young age to save more money instead of spending everything they earn. They should be able and encouraged to establish an independent retirement fund for themselves. Most people, especially those who are on the lower salary levels (i.e. those who need it most), believe they are going to be covered by Social Security in their later years and just don’t know how (or want) to save money. And yet it is possible even on a tight budget. Small regular savings-accounts contributions will increase in value dramatically over time with compounded interest. And for those who truly can’t seem to save a penny because of family obligations or other difficulties, the focus should be on improving professional skills and hence one's financial situation (fun and yet still very instructive videos about budgeting and getting oneself out of debt and into financial security).
7. For the truly indigent and needy individuals, pass legislation encouraging local nonprofits to expand their aid programs and to function in a more targeted and community-oriented way.
8. Educate youngsters – and adults – about the dangers of the overuse or abuse of credit, and about the terrible losses that can occur due to the punitive (and rightly so) expense of not paying revolving credit accounts within the first month or so. (This is compound interest in reverse times ten.)
9. Other options that do not involve increasing government intrusion into the marketplace or inventing unconstitutional legislation, but that would cure some injustices in the status quo. (More on those another day.)

That may sound hard and/or unrealistic, but that’s what I believe must be done. Do I think it will be done? I’m not betting on it.

Financial Pointers for a Teenager

As a followup to my previous post, parents have been asking for pointers for their kids who will soon want to become more financially independent. Here is what I would tell these youngsters:

Thanks to Funny Everyday for the image.

Eight Steps to Financial Maturity

Step One

If you haven’t done so already, find a way to get your first experiences with being employed and receiving a paycheck, even if it’s part time or short term. There’s nothing like getting paid for work to give you some profound financial understanding. You'll also need to open a checking account, and why not also a savings account at the same time. We'll talk about those shortly.

When you do get your first paycheck, take a look at your salary and how the final amount is calculated. You will see that your employer pays out quite a bit more money than you receive. This is because he is paying the federal and state taxes that apply to your situation.

If someone tries to tell you that it is the employer who is paying those taxes, you should know that he would very likely pay you more if those taxes were not obligatory. More about this someday if you have questions about it.

Step Two

Once you have opened your bank accounts, be sure you have learned how to balance your checkbook, and keep your savings account up to date. This means that every time you use your debit card or a check to pay for something, you must write the amount in your checkbook so that you know exactly how much money you have left in the account. Overdrawing on your account will be very expensive. And don’t forget any regular bank expenses such as small maintenance fees, unless your bank offers you an account without any. Be sure to ask the banker about this when you open the accounts.

Step Three

Try to understand a little about the history of money. You may have already seen my little introduction to this. If so, you’re ahead of the game. If not, I would suggest you take a few minutes to understand some basic notions.

Step Four

Do a little reality exercise as follows: Get out some paper and make a list of your expenses during each day. Do this every day, and I mean every single day, and every single penny. Don’t worry, it doesn’t take more than 30 seconds.

The justification is this:  I don’t think there’s a human alive who doesn’t arrive at the end of the month wondering where the money went. Some even get paranoid and think somebody must have stolen it! And that’s probably not the case. We simply spend way more than we think, because small expenditures add up over time.

Step Five

Once you have gotten into the habit of doing this for about a month, prepare a neat page with columns and rows. Then take a look at your listed items. What are the major categories of your expenses? Examples might be Starbucks (it's amazing how much kids spend at Starbucks), clothing, drugstore items, gifts, rent, food, school-related, transportation, eventually vacation, insurance, taxes, things of this sort. Then add a column for miscellaneous, and another for savings.

Now: Every evening, put your daily expenses under one of the columns. By doing this little chore on a daily basis you will begin to see how to set up what’s called a budget. It will help you become conscious of how much you are spending and where you might be able to change your spending habits. 

Later in life, this little discipline will come in handy when you have a family to organize, or other plans. It will put you solidly in control of your finances. (Here's a nice little nonprofit that sells a neat budget booklet that will facilitate this for you.)

Step Six

You will be tempted soon, if not already, to sign up for a credit card. Keep in mind that savings are your friend, and credit (actually debt) is your enemy. As a youngster, you start out with no credit at all, but at some point you will find it important to have a good credit record. The best way to get a card is through a store like Walmart. Later you will be able to apply for other types of cards.

BUT … BEWARE!

Credit cards are devilish. They encourage you to spend more than you can earn, or receive as allowance. You will be allowed to go into debt if you promise to pay the card company back over time, assuming the card company believes you. But the hitch is that they will try to take a huge amount of money for this service, sometimes up to 14-26% annual interest. And they’re sneaky, because they’ll only ask for a small sum every month. You should understand that they do that because they get much more of your money this way. You are the obvious loser in this arrangement.

Let’s just try the experiment on our calculator: Enter an amount representing a purchase, say $200. Your credit card will charge you something like 18% annual interest. When the first bill is due, you pay the minimum, for example, $10. You now owe $190 plus $2.85 for the interest. The next month you pay $10, and you now owe $182.85 plus $2.74. Keep doing that until the whole debt is paid off. Two years later, you will have paid the $200, plus another $70.64. That’s 35% more than the original price!

And the worst part is that while you’re paying the minimum amount every month, you think you still have lots more credit to spend, and if you're not smart you probably will spend it. But obviously that just makes it much worse, since what you owe will increase alongside the interest amount.

Is it really worth it? You could instead have waited a couple of months and saved up enough money to buy whatever it is for the $200. Then you could start saving right away for your next purchase, instead of paying interest to the bank.

Believe it or not, many Americans have several credit cards that they are paying off all the time. This means they are constantly indebted to some bank, and many have no savings at all. Sometimes they are late in paying even the minimum, and the bank charges them horrendous late fees. I doubt these people have ever taken the time to calculate how much money they are paying for the privilege of getting themselves into debt. A few get into so much debt that they can’t get out of it without some kind of intervention.

If you're going to have credit cards, my recommendation is that you pay off all charges every single month, in total, period. Use the card as a convenient payment device, and not as a magic source of extra money. Do this, and your credit rating will be good. And you will be smarter than 95 percent of humanity.

Be sure to ask your bank to sign you up for smartphone notifications of every expenditure, even small ones. It happens frequently that our credit card or bank card numbers are stolen, and if you catch any improper expenses immediately, you can call the bank and get the charges reversed. But you have to act fast.

Sometimes – very rarely for most of us – credit can be helpful. For example, you may unexpectedly need a car to drive to work or school. If you have a credit card, you might be able to buy a cheap car with it, and then pay off the amount over time. This may actually be something you'd want to do in spite of the extra interest expense. But be sure to calculate all the amounts you will pay, including the interest, to find out the total cost of the car. And of course you want to be certain that you will be able to pay off the debt with whatever income you will be receiving and still have enough money for your other expenses.

Step Seven

Start thinking about saving a little money every month for future need. You will be surprised how often you’ll find something that you’d like to buy but can’t afford. And small savings every month add up surprisingly quickly. I just heard from a friend that her mother started a small savings account in her early 20s with about $25 a month, and by the time she was retiring, it had over $200,000 in the account!

Step Eight

I know it seems too early, but think about eventually preparing for your retirement. You will not be happy in your old age if you don’t have any savings. We tend to be a little nonchalant about this, but when you do get there, you will be very happy to have saved up a good sum of money. You don’t want to count on whatever small benefits the government might have for you some 50 years from now.

When you get to that point where you are saving a good bit of money, perhaps we can discuss how best to invest and protect it over time.