"Social Security benefits were said to be one leg of a three-legged stool consisting of Social Security, private pensions, and savings and investment. The metaphor was intended to convey the idea that all three approaches were needed to provide stable income security in retirement."
So says the Social Security Administration, describing the history of how it came to be. But lately, this "stool" has started looking awful wobbly.
First they took our pensions ...
In "Your Incredible Vanishing Pension," I described the tragic tale of Bethlehem Steel. When this giant of American industry went bust in 2001, it took the fortunes of thousands of investors with it and imperiled the retirements of more than 130,000 existing and retired workers. By the time Mittal Steel (NYSE: MT ) , now ArcelorMittal, stepped in to pick up the scraps, a government takeover of Beth Steel's pension program had already cut benefits roughly in half.
Other giants with similarly shaky pension funds, such as U.S. Steel (NYSE: X ) , have so far avoided Beth Steel's fate. But across America, the trend is clear: Rather than fix their pension problems, corporations such as Wells Fargo (NYSE: WFC ) and FedEx (NYSE: FDX ) are opting instead to phase out the whole concept of "defined benefit" pensions -- where the employer is responsible for certain benefits upon retirement -- and push employees into "defined contribution" 401(k) programs, which place the investment risk on the employee.
Then they took our Social Security ...
So corporate America has already sawed one leg off the retirement stool. And now we hear that the second leg is about to fall off as well. The New York Times reports that for the first time in history, Social Security will run a deficit in 2010. According to the Congressional Budget Office, it's on track to pay out $29 billion more in benefits than it receives in payroll taxes this year.
As the Times tells it, analysts view the first year Social Security pays out more than it takes in as "the first step of a long, slow march to insolvency." That's the point at which the trust fund runs out of money. And when that happens, as Alan Greenspan recently warned, "you have to cut benefits ... because benefits have to equal receipts."
In other words: Social Security is a dead man walking.
I think we're alone now
It wasn't supposed to happen this way. Previous estimates had us hoping Deficit Day wouldn't arrive until 2016. But the Great Recession turned the clock forward. As unemployment skyrocketed, people who lost their jobs were forced to file for Social Security benefits early. Worse, when they lost their jobs, they stopped contributing Social Security taxes. And those lucky few of us who remain employed are discovering that our jobs often pay less than in years past.
Result: More money going out, less money coming in. That's bad for Social Security's balance sheet.
The situation isn't critical yet. Years of collecting more Social Security taxes than we needed to pay out to retirees have the Social Security "lockbox" flush with $2.5 trillion in savings. Recent projections suggest that we won't scrape the bottom of the box until 2037. However, these projections were based on estimates that unemployment would average 8.2% in 2009 and 8.8% in 2010. As we all know, those projections turned out to be a mite optimistic.
What's left? You are.
So with pensions gone the way of the dodo, and Social Security on its last leg, Americans hoping for a secure retirement are left with only one "leg" they can truly count on: ourselves. Our savings and investments. Someone's swiped our three-legged stool, and here we find ourselves, comically hopping around on a pogo stick instead.
That is to say, it would be comical, if the situation weren't so serious. But there's no use crying over spilled red ink. We're big boys and girls, and if the corporations and government have proved themselves irresponsible and incapable of providing for our security, it's time to take responsibility for ourselves. So here's what to do now, in three easy steps:
1. First, quit buying stuff you don't need
I won't lecture you on the little stuff. If you think you need to downgrade to basic cable, or quit paying $5 a pop for a latte and brew Maxwell House at home instead, that's a judgment call only you can make. I'd suggest that a more profitable use of your time is to examine bigger-ticket items. For example, buying a BMW may signal that you've "made it." But if you think you might instead lose it, well ... have you driven a Ford lately?
2. Next, save more
Because the benefits we were counting on receiving won't be as generous as those promised in the past, we've got to make up the difference. How much will that difference be? How much do you need to secure a comfortable retirement, and how much must you save now to ensure it? We've got a whole battery of calculators designed to answer these questions for you on the Rule Your Retirement website.
3. Invest those savings
Last but not least, you need to invest those savings while time's still on your side. I know -- a lot of people got hurt by the market crash. But for those who weren't overspending, were saving, and had cash handy, the market's plunge offered a real buying opportunity. Since hitting its low point on March 9, 2009, the stock market has surged back by 65%, while investors in Ford (NYSE: F ) , Apple (NYSE: AAPL ) , and American Express (NYSE: AXP ) are all sitting on gains of 100% and more. That could have been you -- and with the S&P 500 still sitting well beneath its peak, it still can be.
Now's not the time to sit on your ... stool. Now's the time to master the fine art of pogo-stick hopping. Visit us at Rule Your Retirement, and take advantage of our calculators and retirement advice with a free guest pass. We're here to help.
Fool contributor Rich Smith does not own shares of any company named above. American Express is a Motley Fool Inside Value recommendation. Apple, Ford Motor, and FedEx are Motley Fool Stock Advisor selections. The Motley Fool's disclosure policy plans to take up pogo-stick hopping just as soon as it figures out this darned hula hoop.