As Congress and President Barack Obama bicker over what should be included in the budget for the government's fiscal 2014, there's a very real chance they won't come to an agreement before Tuesday. If so, that could trigger another government shutdown, as Oct. 1 is the first day of the federal fiscal year. Without a budget or continuing resolution spending authorization, a lot of money can't be spent.
While some parts of the federal government would be furloughed and others would operate on skeleton staffs during a shutdown, Social Security benefits are expected to be paid on schedule. Those checks are considered "mandatory" payments not subject to the appropriations process and thus will continue regardless of whether the politicians find common ground by Tuesday.
Safe for now -- but not forever
While Social Security checks will continue in the near term regardless of the shutdown situation, the longer-term future of that program is on significantly shakier grounds. According to the most recent Social Security Trustees' Report, the Social Security Trust Funds are on track to run out of cash in 2033. When that happens, the program's revenues are expected to only cover around 77% of its scheduled benefit levels; without legislative changes, benefits would likely be cut accordingly.
Even if the same Congress and president who can't get together to fund next month's budget can somehow fix the long-term Social Security crisis, the news isn't all that great. Even at its current levels, the average Social Security check to a retired worker sits at levels below what workers earn on minimum wage in some states.
Additionally, there are reasons to believe the cost of living adjustment that increases Social Security payments in line with inflation understates the actual inflation felt by seniors. This is due in large part to health-care costs, which have generally risen faster than the overall inflation rate for quite some time. In addition, people generally need more health-care services as they age. That combination means seniors' costs are likely to rise faster than their Social Security checks.
Your best bet -- invest to cover the gaps
Whether you're worried about the Trust Funds emptying, cost of living adjustments that don't keep up, or just want to live a better-than-minimum-wage lifestyle, you need a plan to help your future. Your best bet is to start investing now for the future in order to more easily cover the expenses that Social Security won't be able to cover for you.
These days, with interest rates so low, there really is no such thing as a "risk free" investment. Even five-year Treasury bonds pay less than the current inflation rate, and while longer-term bonds do pay more, it's not really enough more to compensate for the risk of rising inflation over time.
Indeed, about the closest thing to a risk-free investment that covers inflation at the moment are Treasury Inflation Protected Securities, or TIPS. Those are U.S. Treasury bonds that step up their principle each year with inflation. One of the easiest ways to buy them is through the iShares Barclays TIPS Bond Fund (NYSEMKT:TIP) exchange-traded funds, which will manage redemptions and rollovers for you.
There are a few catches with TIPS, though. For one, you're taxed on the inflation adjustment in the year it happens, even though you can't spend that cash until you sell the bond. For another, the interest rates on TIPS is abysmally low. In a recent auction of 10-year TIPS, the bonds fetched a 0.5% yield. With rates that low, if inflation is high enough, you could conceivably pay more in taxes on your inflation adjustment than you receive in interest payments from the bond itself.
Pick your risky vehicle
These days, if you want a chance at anything resembling a real return, you need to take risks. Unless you're already rich enough that Social Security's pending troubles won't faze your lifestyle, you pretty much to look for real returns to cover the gap it will leave when the Trust Fund is empty. You can mix and match between these and other styles, but here are a few key options.
Stocks: The S&P 500 is a basket of 500 of the largest U.S. companies, and it's easily purchased via a low-cost ETF such as the SPDR S&P 500 (NYSEMKT:SPY). With low overhead costs and instant diversification, it's a great way to get market performance without the incremental risk of owning individual companies. If you'd like to add international exposure, Vanguard's Total International Stock Index (NASDAQ:VXUS) ETF serves a similar function for roughly 5,000 non-U.S. companies.
Real estate: Vanguard's REIT Index (NYSEMKT:VNQ) ETF is a way to buy into a basket of real-estate investment trusts. An ETF like that would let you get many of the benefits of owning real estate without the headaches of being a landlord. And with a very low 0.1% expense ratio, the fund's overhead won't take much of a bite out of your potential returns.
Corporate bonds: Investment-grade corporate bonds carry yields a bit better than comparable-term Treasury bonds do, giving them a better chance at providing a real return. An easy way to get an investable basket of those is through the iShares iBoxx $ Investment Grade Corporate Bond (NYSEMKT:LQD) ETF. With an expense ratio of only 0.15%, it's a low-cost way to buy those bonds without the effort involved in managing an individual bond portfolio.
Of course, the risks in any of these vehicles are real. As anyone who invested through the recent "Lost Decade" knows, stocks go down as well as up. Additionally, it was a leveraged-real-estate meltdown that set off the Great Recession we're just now working our way out of. And if interest rates rise, as generally expected, existing corporate bonds can see their market values fall -- even if the companies ultimately make good on their payments.
Still, it beats the alternative
In reality, your money and your future cash flow are at risk, no matter what you do. If you do nothing, the current trajectory of Social Security suggests a 20% to 25% haircut in your check will be heading your way within the next two decades. That's well within the typical life expectancy of most people working today, and even some younger Social Security recipients.
By starting to invest now to cover that gap when the Trust Fund is empty about 20 years from now, you're greatly improving your chances of a comfortable retirement. After all, despite the risks involved, even lousy investing beats not investing at all.