Social Security's unknown future and 401(k) investing

One of the great political questions of our day is whether or not Social Security can be saved, and if so, how?

 

There are many competing voices in the press, from financial advisors, the elected officials on Capitol Hill, and other politicians, about what is the best solution for the ills that plague this government institutionalized program that began under President Franklin D. Roosevelt. It is crisis time for many Americans who depend on their monthly disbursements, and all they want is a reasonable and sustainable solution that will guarantee them that the money they were forced to place in this system actually returns to them.

 

What was Social Security supposed to provide?

Many millions of Americans rely on social security benefits to meet their monthly financial needs, and most aren’t swinging from grand chandeliers in palaces of gold. Social security was never intended to be the sole providers of retirement income. In the past, family members, churches, and communities banded together to take care of the aged members of society.

Over time, since the Great Depression, the government saw and took an opportunity to tell people that they were unable to save, invest, and provide for themselves.  Instead, the government would take part of their income and sock it away until one turned 64 and they then would get their money back in monthly increments. This is not an investment but a taxation, mind you. Congress has used this money for years for other purposes, radically depleting the social security account our nation is supposed to maintain. Both major political parties have varying solutions to the problem without confessing that they are the problem. It has become a piggy bank that simply does not get repaid. “Just print more money,” seems to be their mantra.

 

Affect of the Babyboomers 

Now with our aging population, suddenly concerns about the veracity and sustainability of social security have come to the forefront of political talk and rightfully so, our population is worried.

For many who have seen their 401(k) accounts melt away in the radiant remains of the current economic downturn, their government check each month has increased in value and importance to them. New strategies have had to be employed as worry and fear about being able to continue a certain quality of life have run head on into the reality of their former dreams and goals about retirement.

 

Hope is still alive

Still, opportunities exist for those who are seeking to rebuild their 401(k) so they are able to still fulfill their retirement dreams and goals, but it will take finding the right financial advisor. Rock Hill retirement planner Matthew Griffin suggests that relying on your company’s 401(k) manager is not wise because their job is not to help you plan for your future and they typically are not investment experts.  This new era requires a steady and sober approach to the marketplace if one is to rebuild their accounts and get back on course. He also suggests that people under 40, who still have more time to rebuild than those who are older, should not allow that extra time to make them unworried.

Griffin suggests you take hold of the freedom we have to be more in control of your economic future, especially since social security may not be around by the time that age group retires. It is less about being aggressive in the marketplace than being wise with your future. Let your money work for you. Regardless of what plan Congress finally decides on, social security will never match private sector growth (or the potential of its losses) but with a little help from a financial advisor, you can climb the mountain of your future goals with confidence and hope. 

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What are Social Security "totalization agreements"?

A social security 'Totalization' agreement is a provision between two or more countries concerning dual coverage and taxation of individuals through exposure to multiple social security systems.

In the United States there are approximately 21 totalization agreements with other countries. Through totalization agreements, social security is accumulated through the social security system in which one works and pays taxes independent of citizenship with certain exceptions such as those listed below.

• Detached worker rule: An aspect of totalization that allows continued payment into the social security system of one's base country during employer relocations under 5 years.

• Extenuating review: In cases of unusual Social Security situation arising from non-conventional aspects of international employment, such cases may receive special review and/or exemption from the totalization agreement.

Individuals who are offered work overseas may want to consider totalization agreements in their compensation packages as employment in countries where no totalization agreement is in place could lead to considerably higher taxation of income. In cases where totalization agreements do not apply, income tax may be greater however, and social security coverage qualification may also be higher.

Attributes of totalization

Social security totalization agreements were appealed through the Social Security Totalization Agreement Reform Act of 2007, and are made possible via sections 202, 203, 210, 211 and 233 of the U.S. Social Security Act. Specifically, the 2007 appeal cites non-lawful residents of the United States who work in the United States as being ineligible for totalazation benefits. Totalization agreements between the U.S. and international countries commenced in the early 1970's. Specific attributes of the totalization agreements include the following:

• Determines contribution amounts and eligibility
• Includes mostly European countries Australia, Japan, Chile and South Korea
• Reduces dual coverage and over taxation
• Protects national social security systems from excess financial burden

Advantages and disadvantages of totalization

There are pros and cons to totalization agreements. For example, one of the advantages of totalization make it possible for self-employed individuals within the United States who are foreign nationals to receive social security compensation and vice versa. A few other benefits of social security totalization are the following:

• Provides greater career related retirement plan options to qualifying international workers
• Non-qualifying benefits in participating countries can be totalized under the agreement allowing partial benefits
• Allows employers to avoid disruption in human resource management of oversees employees

In addition to the advantages of social security totalization are several disadvantages. For example, because international law and regulation can be complex, subject to bureaucracy and change, advantages in totalization agreements in place at one point in time, may not be as beneficial in terms of coverage at a future point in time. A few disadvantages of social security totalization include the following:

• Totalization benefits do not include countries in which no agreement is in place
• Social Security benefits may be worse in the country of employment
• Social Security contributions may be higher in the country of employment
• Bureaucratic procedure of actualizing totalization may be complicated

Development in Social Security totalization

As the world becomes increasingly globalized, the trend is toward trade agreements that include totalization. These agreements may be monitored and endorsed by a number of trade agreements, political unions and organizations such as the World Trade Organization (WTO), European Union (EU), North American Free Trade Agreement (NAFTA) and the Association of South East Asian Nations (ASEAN).

As international migration increases between income earners of within countries with both existent and non-existent social security Totalization agreements, the need for regulation of, management of and renewed Totalization agreements may be become apparent. For these reasons, compensation, taxation and benefits associated with Totalization agreements may be subject to change over time.

Summary

Social Security Totalization agreements exist between several countries around the World. These agreements exist in an attempt to harmonize and balance social security coverage and taxation of individuals who receive income in countries other than their permanent and/or original country of residence. The attributes of Totalization agreements vary dependent on the laws and agreements themselves as determined by the member nation-states themselves. Consequently, advantages and disadvantages unique to each tantalization agreement may also be different.

Income recipients subject to and not subject to social security tantalization can either benefit from or be disadvantaged by the existence of tantalization agreements or the lack thereof and may therefore want to study their unique income and taxation situations in regard to tantalization agreements. Contacting relevant social security administrations, government authorities, employers, and tax specialists may assist one in determining unique circumstances regarding tantalization of social security.

Sources:

1. http://www.ssa.gov/OP_Home/ssact/ssact-index.htm
2. http://thomas.loc.gov/cgi-bin/query/z?c110:H.R.279:
3. http://www.ssa.gov/pressoffice/factsheets/USandMexico.htm
4. http://maplight.org/map/us/bill/11561/default
5. http://tinyurl.com/4byay6n