Dozens of people have written asking if President Bush's plan to privatize Social Security will reduce their benefits. The answer is "YES". In fact, that is the very foundation of his plan. While no one would ever openly say that the ultimate goal is to reduce retirement benefits (Americans will completely freak out once they find that out), below is an explanation on how "Social Security reform" will eventually lower retirement benefits.
How are retirement benefits calculated today?
Retirement benefits are calculated using a complex formula that takes the prevailing wages into account. By using this formula, senior citizens who live on retirement income alone, can still keep up with working Americans when it comes to the quality of life. (Related article: Americans concerned about retirement income)
What changes does Bush's plan makes?
President Bush thinks that seniors are getting paid more than they should be paid because wages rise faster than prices. He wants to link retirement benefits to the price index. Since prices do not rise as fast as wages, retirement benefits will reduce by a few percentage points each year. Over several years, this difference can reach double digit percentages. Or in other words, quality of life of retired Americans will drop to a point that they might fall into poverty, especially with the rising prescription drug prices. (Related article: Tips on importing prescription drugs from Canada)
Why does President Bush want to reduce retirement benefits of seniors?
It is indeed possible not to reduce retirement benefits of low-income and middle class Americans, but that would require raising taxes (e.g. increase income taxes or raise the limit on income for payroll taxes) on rich Americans, an idea that President Bush does not like. (Related article: President Bush's real agenda behind privatizing Social Security)
How can I protect myself from falling into poverty when I retire?
The privatization of Social Security, as envisioned by President Bush, essentially means that Americans can no longer count on Social Security as their sole source of income during retirement. They will have to supplement their retirement benefits with other sources of income. For example, full/part-time employment, a stable reserve of cash that they can draw from regularly till their death, etc.
In other words, retirement planning is key. While baby boomers and others who are very close to retirement have only a few years to catch up on their retirement planning, if you are young, it is an excellent opportunity to think of personal finance and portfolio management as priorities. (Related article: Basics of 401(K) retirement plan)
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