The modern idea of retirement planning is less about financial independence and more about acclimating clients to the idea of social welfare programs. While some advisers continue to pay lip service to the ideas of financial independence and success, other advisers are awakening to the dim reality of their profession. The fact of the matter is that people are forced into relying on the government for income in their old age. According to the Social Security Administration:
- Social Security benefits represent about 41% of the income of the elderly.
- Among elderly Social Security beneficiaries, 54% of married couples and 73% of unmarried persons receive 50% or more of their income from Social Security.
- Among elderly Social Security beneficiaries, 22% of married couples, and about 43% of unmarried persons, rely on Social Security for 90% or more of their income.
According to the Employee Benefit Research Institute, the average retirement savings of people between the ages of 65–75 is $56,212. Younger generations don't fare any better. Here's how average savings breaks down for different age groups:
- Between the ages of 55–64: $69,127
- Between the ages of 45–54: $43,797
- Between the ages of 35–44: $22,460 and;
- Under the age of 35: $6,306
This money, combined with Social Security benefits, has to pay not only for living expenses but for medical expenses as well. In a recent study, the U.S. Department of Health and Human Services found that people who reach the age of 65 have a 40 percent chance of entering a nursing home. Out of that 40 percent, about 10 percent will stay there for five years or more. If your clients need long-term care, they will have to pay for these costs out of pocket or through a long-term care insurance policy.
The illusion of social programs as a successful retirement planning strategy
It’s important to understand the history behind this. In 1883, Chancellor Otto Von Bismarck introduced the concept of retirement to the German people. His idea was to pay a pension to all non-working German people over the age of 65. Of course, most people didn't live to age 65 at that time in Germany. This meant that Bismark could expand his social program to fund a growing welfare state — something he wanted to do anyway. By inventing the modern concept of retirement, Bismark set the stage for a grand illusion.
The modern concept of retirement is an actualization of the welfare state mentality. Originally called a "social insurance program," Social Security was to provide a safety net for an individual in his old age. In fact, the official Progressive Party platform stated:
This country belongs to the people who inhabit it. Its resources, its business, its institutions and its laws should be utilized, maintained or altered in whatever manner will best promote the general interest.
Progressives of the 1900s did not believe in individual rights. They believed in "social justice." They believed that:
It is time to set the public welfare in the first place.
To accomplish this, the Progressive Party promised:
...to work unceasingly in state and nation for: . . .The protection of home life against the hazards of sickness, irregular employment, and old age through the adoption of a system of social insurance adapted to American use.
Contrary to popular belief, the modern notion of retirement does not rely on a person's ability to accumulate a savings, stop working, and then live off of that savings. Retirement only requires an individual to stop earning an income and instead live primarily off of the government's social insurance programs. While these programs were to be funded by taxpayers, the program itself was not voluntary. Private savings was not the goal. Control and redistribution of wealth was the motive.
The only way to ensure compliance was to force everyone to participate through a special payroll tax, and that's exactly what the government did and continues to do to this day. Forced taxation is bad enough, since it represents outright theft of personal savings to fund a forced retirement program at the expense of personal freedom and an individual's right to his own property (i.e. his savings). However, forced taxation doesn't cut it anymore.
The government must now take everyone's future savings by borrowing money to fund Social Security because it is currently running a deficit and is projected to continue running a deficit until the trust fund is completely drained in 2036. Once this happens, tax receipts will only cover three-quarters of promised benefits and only until 2085. Medicare and Medicaid are facing the same basic problems, but they are in much worse shape. The ship of social insurance is sinking. Where are the lifeboats?
In financial planning, more focus is placed on tax law than financial education. More focus is on "gaming" the system, rather than teaching people how to be truly productive. For example, many advisers help their clients to take advantage of the Medicare system to receive free nursing home care from the State through so-called "Medicare planning" strategies. Advisers tell clients not to rely on Social Security, yet turn around and use projected Social Security income in their retirement planning calculations. This does not reinforce freedom and financial independence.
Social programs only give the illusion of financial independence. They give the illusion of personal wealth. They give the illusion of financial security. They give the illusion that some kind of plan has been made and goals have been accomplished. The reality is that reliance on social programs is evidence that a person has failed, financially, and that he is completely dependent and at the mercy of the government. Clients must be willing to give up the idea that government is there to provide for them. As financial advisers, we must be ready to teach clients principles of financial planning and personal self-responsibility.