Your 401k Is Killing Social Security

To kick off our first Reflection Sunday post let’s talk about something a lot of us are thinking about right now. Will we be able to retire and will Social Security be there for us? Lets do some simple addition, subtraction and multiplication shall we.

Back in the 1970’s there were about 300,000 corporations in the United States that provided pension plans for their employees. Today there are only less than 19,000 that do. The biggest reason for the transition is ‘COST’. Providing pension plans (free money) to employees will not keep the corporations competitive enough in today’s global economy. That is why PERSONAL Savings is big nowadays. Whatever worked for your Grand Father or Father, like staying in 1 company for 30 or 40 years will no longer work for you. When these corporations made the transition from providing pension plans to offering 401k, it impacted how we now have to save our hard earned money. Bottom line – your 401k is Killing our nations Social Security.

Let’s take an example – Say its the year 2008 (which it is) and Mr. Ray Pin-Nyoko makes $35,000 a year and he gets paid bi-weekly. His pay check before taxes (Gross Pay) every two weeks is $1,346.15.  Now lets look at the different parts of the equation.

Social Security Funding – The funding for Social Security is from taking out Social Security Tax from each employees paycheck. Social Security Tax is 7.65%. So traditionally, Uncle Sam will see Ray’s $1,346.15 and take out the 7.65% which is $102.98.

401k Contribution – But in today’s world Ray contributes into a 401k. Ray’s contribution into his 401k is pre-tax. What does that mean? Before the Uncle Sam takes his share in taxes, you displace your gross income by contributing a percentage of your pay into your 401k account. Let’s say Ray contributes 4% into his 401k because his company matches 4%. Now we take his pay check $1,346.15 and take out 4% which is $54.61. Now Uncle Sam is left with only $1,291.54 of your income to take the 7.65% Social Security Tax from. Boo hoo hoo. That’s only $98.80 compared to what would have been$102.98.

Now that’s only $4.18 difference, how can that be killing our Social Security? Hmmmm, let me count the ways… How many people work in the US again? Lets say about 100 Million of the 300 Million people in the US work. $4.18 x 100,000,000 = $418,000,000. That’s $418 Million every 2 weeks. $418,000,000 x 26 bi-weekly pay checks in a year = $10,868,000,000. In a full year that comes out to a whopping $11 Thousand Million or $11 Billion with a “B”.

ELEVEN FREAKING BILLION DOLLARS is what Gen-X (me) and Gen-Y (my siblings) will be missing out on every freaking year. You wanna multiply that with 40 more years before I start collecting Social Security? And in this example it does not even include the employees in the higher tax brackets and the equation does not include the employees who are contributing more than 4%.

One of the main consequences we are going to feel is the increase in our taxes in the future to compensate for the lack of funding. I love the last sentence of this article, and this is just the beginning folks. The increase in our taxes will partly fund the Baby Boomer generations retirement. If you think about it, it’s pretty sad right?

Are you ready if Social Security is not there for you? Are you saving at all? If you are, what kinds of savings do you have? Why are you saving? What is your plan?

- Eric Tan – Feeding The Crave
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Tagged as: Money, Pension, Savings, Social Security, Tax