According to a University of Pennsylvania economist, just three questions can serve as a barometer of financial literacy. Do give them a try. I’ve listed the correct answers at the end of today’s post:
As a pension expert, Wharton School (University of Pennsylvania) economist Olivia S. Mitchell tells us that financially literate individuals prepare for retirement more wisely. They are better at saving and investing.
Now that Social Security is being hit by COVID-19, retirement planning is even more important.
Social Security’s Health
Insolvency is creeping closer.
Social Security already had a problem because of the baby boomers. As a pay-as-you-go system, current Social Security payroll taxes go to current recipients. But because of the baby boomers, there are too many retirees and not enough workers.
Then with COVID-19’s layoffs and lockdowns, the problems got worse. On one end, payroll tax revenue is increasingly inadequate while on the spending side, more people are retiring earlier. The Congressional Budget Office says the benefits shortfall will be here in a decade or so.
They are most worried about the OASI (Old Age and Survivors Insurance) Trust Fund. Whenever revenue exceeded spending, OASI grew. As a result, it accumulated enough money to make up for insufficient tax revenue. The problem is that OASI and a much smaller DI (Disability Insurance) trust fund are shrinking even faster from COVID-19.
Our Bottom Line: The Federal Budget
Most of Social Security funding comes from a 12.4 percent payroll tax that is shared by employers and employees (unless you are self-employed). It then becomes a massive slice of federal spending:
Many of us are wondering when the Congress and the President will talk more about a solution. Former Vice President Joe Biden and most economists believe that the program should retain its dedicated stream of income. His solutions relate to the affluent paying more into the system and receiving relatively less. Meanwhile, eliminating the payroll tax, as President Trump has suggested, would be a chancy solution for a program that approximately half of the 65+ population depends on for at least half of their income.
Also though returning to where we began, most of us need better retirement planning.
My sources and more: An IMF profile of Wharton economist Olivia Mitchell and her financial literacy work with Annamaria Lusardi is a good starting point. From there, the NY Times had more about the COVID connection as did this WSJ OPINION and a CBO report.