When politicians and media talking heads start throwing around numbers in the trillions or even billions it can be hard to comprehend. But when the conversation is about the government spending money that it doesn’t have, everyone needs to pay attention.

American workers receive statements from the Social Security Administration that tell them about their future estimated benefits, based on their work history and taxed Social Security earnings. On the front page of that statement is a heading that says: “About Social Security’s future…”

The second paragraph below the heading states this:

“In 2017 we will begin paying more in benefits than we collect in taxes. Without changes, by 2041 the Social Security Trust Fund will be exhausted and there will be enough money to pay only about 78 cents for each dollar of scheduled benefits. We need to resolve these issues soon to make sure Social Security continues to provide a foundation of protection for future generations.”

At the bottom of the page is an explanation that the estimates are based on intermediate assumptions from the Social Security Trustees Annual Report to Congress. Given the economic problems of the past couple of years and the trillions of dollars spent in an attempt to bolster the economy, one has to consider that Social Security might run out of money even earlier than these projections.

An article by Eric Sprott and David Franklin of Sprott Asset Management has more to say about U.S. deficit spending:

“The rating agencies’ ranking of the United States is even more disconnected from reality. To believe that the US sets the benchmark for sovereign debt credit ratings is preposterous. While we have written ad nauseam about the excessive debt issuance by the United States, we found a recent update written by United States Government Accountability Office (GAO) to be particularly instructive. The update noted the US’s budget deficit equivalent to 9.9% of GDP in 2009 — the largest since 1945 — and stated that without significant policy changes the US government would soon face an ‘unsustainable growth in debt.’

“This was not news to us. It goes on to state, however, that using reasonable assumptions, ‘roughly 93 cents of every dollar of federal revenue will be spent on the major entitlement programs and net interest costs by 2020.’ This is news! In less than 10 years, using reasonable assumptions, there will essentially be no money left to run the US government - 93% of all tax revenues the US government collects will go to pay Social Security, Medicare, Medicaid and the interest costs on their national debt. This implies no money left over for defense, homeland security, welfare, unemployment benefits, education or anything else we associate with the normal business of government.”

This is important because the majority of Americans are counting on Social Security to fund a significant portion of their retirement financial needs. A recent study by the Center for Retirement Research at Boston College showed that in 2009, 51% of Americans were at risk of being unable to maintain their pre-retirement standard of living after retirement. That compares to just 30% 20 years earlier in 1989.

Greece is currently facing the type of debt crisis that could confront the United States in a few years. Greece simply doesn’t have enough money to meet all of its spending obligations. It has reached the point where no other country wants to extend Greece any more credit.

Because Greece is a member of the European Union (EU), its options for resolving its debt are few. Greece can’t simply hyper-inflate as some countries have done unless it is willing to withdraw from the EU. The available choices will all be painful for Greek citizens. There have already been strikes and demonstrations and civil unrest is likely to increase as the crisis deepens.

None of this is meant to imply that the U.S. government will default on its debts or that the government is destined for bankruptcy. There is certainly reason for concern, however, when government agencies like the Social Security Administration and the GAO are warning of a debt crisis.

For pre-retirees, this means that they need to be doing more to secure their own retirement. One way to help do that is by diversifying retirement options. Diversification across market segments has long been touted as a method to reduce market risk. But an even more secure approach is to diversify among various types of retirement instruments. That could include traditional pensions, IRAs, 401Ks, fixed income options, and a wide range of insurance products.

As the current economic crisis has shown, investments once considered low risk such as one’s own home, might not be secure after all. And under current conditions, relying on the government to fully provide for one’s retirement needs could be equally short-sighted.
F.S.