With or Without Social Security Young People Should be Saving Now  
By Stephanie Kong

Most of us heard the story of Chicken Little when we were youngsters.   After being hit on the head by a mysterious piece of something, Chicken Little erroneously concluded that the sky was falling.   She rushed through the farm alerting the other animals to the news and I believe in the end, all the animals were eaten by a fox.   The moral of the story: stick to the facts of a situation and don't rush to conclusions.

The tendency to exaggerate the gravity of a situation (no pun intended) is common in life and appears to be the case with the proposed Social Security reforms.   To be sure, the prospect of changing Social Security is a big deal and one that we as taxpayers should monitor closely.   Yet, the issue seems to have deteriorated into partisan warfare, with Republicans throwing around words like “crisis” and “bankruptcy” and Democrats levying “Lies! Lies!” at President Bush.

What we know is this:

•  Taxes now collected pay for those presently receiving Social Security benefits.   So basically, what is taken out of your paycheck right now is being used to pay for the Social Security checks that your grandparents and possibly your parents are receiving right now.

•  In the next one to two decades (they offer 2018 as the estimated year), a large number of people will be retiring.   So either taxes will need to be raised (which would suck for workers) or benefits will be seriously cut (which would suck for retirees.)

•  Bush's proposal for Social Security reform will remove the taxing, pooling, then distribution of funds—how the system is presently structured.   Instead, workers would pay into individual accounts.   So you wouldn't be paying for your grandma's Social Security check; you'd be paying into your own account, accessible by only you when you retire.

Social Security reform is tricky; making changes to a 70 year-old institution is going to be, regardless of what is done.   But the idea that there will be no government-sponsored retirement plan at all when we get older is a bit of a panicked interpretation of present events.   Yet, the panic and concern spawned by Social Security reform is a good thing in that it forces us—us being young people—to look ahead and take necessary precautions to secure our futures.

Suze Orman, personal finance specialist, author and host of her own television program on CNBC, recently wrote “The Money Book for the Young Fabulous & Broke.”   On a recorded publicity tour, presently being broadcast on PBS, she speaks extensively on the topics of saving money, reducing debt and saving for retirement.   During the presentation, when asked about impending changes to Social Security, she comments that changes to Social Security should not at all impact a person's strategy concerning saving for retirement.   She says that a person should never plan to subsist on Social Security benefits alone.   Intrigued, I asked my grandmother how much she receives for Social Security.   She confirmed Orman's warning: just under $300 per month.

That being said, it is imperative to save for retirement, even in our 20s.   But 401K, Roth IRA, mutual funds, CDs—what does it all mean?   Go to www.ineed2know.org/financialterms.htm, a non-profit resource website, for a clear explanation of ten important investment terms.  

There are two ways to save for retirement: through a 401K or an IRA.   And just so we're clear: you can and should invest in both if you have that option.   Investing in a 401K with your employer (or 403b if you work at a non-profit organization) is a great way to invest in your retirement as long as your company matches your contribution.   For example, my company matches nearly 67% for up to the first 6% of my income that I contribute.   So for every $100 I put into my 401K, I get another $66.67 to put in there as well.   Free money.   401Ks rock.   And this money will continue to grow as it sits in “storage.”

After you contribute the maximum amount into your 401K, invest in an IRA, preferably a Roth IRA if you qualify.   IRAs are Independent Retirement Accounts and allow you to contribute up to a set amount of money per year ($3000 in 2004, $4000 in 2005) that grows the longer it sits in your account.   IRAs are available at financial institutions as well as banks.   In choosing, be sure to check out the potential risks and gains associated with each plan that you consider.   The goal is to have the most money possible after 40-50 years—you can afford to take risks for the potential of high earnings.

As for saving, you can put your money into a regular savings account or buy CDs, which are Certificates of Deposit offered through most banks.   This will help you to save up money, but will not offer significant gains.   For example, putting your money in a savings account means that you can access the money whenever you want.   But because of this accessibility, the interest you receive is, frankly, paltry.   Think 0.10%.   Read that carefully: one-tenth of one percent.   So for example, if you put $100 in a savings account, you will earn 10 cents in interest.   Compare that to a CD which will have a fixed period, say five years.   You cannot touch that money for the five years (if you do, you will be hit with very substantial fees).   After the five years, you will earn around 3% interest.   So for keeping $100 in a CD, you will have earned $3.  

You can also make money, as opposed to save money, by playing the stock market.   The risks are greater, but the rewards can be better too.   (They can also be devastating—you've got to know what you're doing.)   Read up, take a class, consult a financial specialist for more information.

All the hullabaloo about Social Security reform reminds me of the panic surrounding Y2K when we approached the year 2000.   Technology experts warned us of chaos and bedlam—that bank accounts would be lost, computers would explode and civilization (as we techies knew it) would be lost in a heartbeat.   Guess what: nothing happened.   As far as I know, the switch from 1999 to 2000 went smoothly.   Was the panic all for naught? Perhaps.   But at the same time, it forced us to prepare for any problems that could have occurred.

I see Social Security reform in the same light.   What happens, what is decided, what may potentially get shot down during discussions: we don't know.   But that doesn't excuse us from the responsibility of making the necessary preparations for our future security and well-being.   Start saving money and start saving it now.