The Paradox of Retirement Planning

I’ve just realized that planning for retirement is kind of a catch 22. This is based on a couple of premises that I will lay out, and then it should hopefully become clear why Social Security payments and the performance of your individual retirement portfolio, should you choose to go in that direction, are correlated together, and why the failure or success of Social Security also means the failure or success of your retirement portfolio.

Many people point out that there is a budgetary shortfall for Social Security, projected at such and such a rate that will bankrupt the Social Security program in such and such a year. Usually the year projected is something like 2039 or something else about two to five decades in the future.

Certain people are prone to take this math as gospel, and others disregard it entirely. I agree with the premise that Social Security is a ponzi scheme projecting itself on a runaway path to bankruptcy, if current trajectories hold. However, the fact of the matter is that Social Security, your 401K, your salary, and everything else about your financial situation depend upon another factor entirely.

That factor is the underlying performance of the global economy.

You see, if the economy grows at an average rate of 1% for the next twenty years, Social Security is probably doomed. If it grows at 2%, there may be big cuts. If it grows at 4%, Social Security payments will expand appreciably.

Note that when I say Social Security “is probably doomed”, it doesn’t mean that the program will literally be cancelled. Even in a depression economy, there wouldn’t be the political will for such a solution. What is much more likely to happen is that the size of Social Security payments will be allowed to decline in real terms to an extent that a senior citizen relying only upon these payments to live would not even have a prayer of living alone. Not like now, where seniors live very spare. But to the point where a Social Security check would be something like $100-$200/month in current terms. At this level, the check would basically serve as pocket change for destitute seniors, whose best chances would involve living with a child if one could be found.

But what the hell is going to happen to your stock portfolio in such a nightmare scenario? It will probably stagnate as inflation eats it away, in one scenario, or decline precipitously in the fallout of a deflationary depression, in the other.

Conversely, if the economy grows at a rapid enough rate to make a typical investment portfolio successful, then it will actually be difficult for someone in 2012 to imagine the level of prosperity our society will enjoy, 30 years hence. I personally plan to work until I am physically unable to do so, as long as I can find a compelling psychological motivation to do so. Assuming I quit when I was 70, that would mean that I would retire in 2055. If the economy at that time was four times the size of our current economy, a Social Security check alone would be enough to live a glamorous existence.

So therein lies the “catch 22” of retirement, whenever I really stop to think about it.

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