A recent headline from the Social Security Board of Trustees said, “Combined Trust Funds Project Depletion One Year Sooner Than Last Year” gave the media something to talk about. The New York Times tweeted “Social Security will be depleted in 2033.” (1)
Let’s try to separate the facts from the headlines, tweets, and sound bites.
How it works: The money to pay Social Security benefits comes from both: 1) taxes collected today from all of us working and paying into the system; 2) money held in the Social Security Trust Fund that was collected in years past to pay for future benefits. (2)
Short background: The experiment of Social Security was signed into law by President Franklin Roosevelt August 14,1935. Many assumptions were debated and continue to be discussed about how to adequately fund the program. The system has been changed periodically with the last major overhaul in the system was in 1983 when the full retirement age was increased to 67. (3 & 4)
The problem is that under current rules, the system is underfunded. Fewer people working versus the number receiving benefits. This means that money being collected today from working people will only support about 75 to 80% of the current benefits being paid out. The remainder of the money to pay benefits is coming from the Social Security Trust Fund. At the current rate money is coming out of the trust fund, it will be out of money by 2033. (1)
This is nothing new. The Social Security Board of Trustees releases a report every year telling, anyone that wants to know, the status the Trust Fund. The major overhaul extending the full retirement age to 67 in 1983 was the last major change. Since then, Congress has only kicked the can down the road and procrastinated (note the Sept 23rd blog about procrastination) about dealing with the issue. Think about it. If you had not serviced your car or done any maintenance on your home in thirty-eight years, what kind of condition would they be in? Are you better off fixing small problems & doing regular maintenance to your home and car now, or is it wiser to wait for the car to be dead in traffic or waiting until the water is raining on the dining room table during Thanksgiving to fix them? (1, 5, 6)
The consequences of Congress doing nothing is NOT all Social Security checks stopping. However, if nothing changes, benefits could be reduced by 25%. This would be tragic for many Americans. The political pressure from retirees will ultimately force Congress to do the right thing and find solutions to fix the problem.
Solutions to the problem can and will probably come in more than one or two changes in the system.
Social Security tax on your income is 6.2% paid by you and 6.2% paid by your employer on the first $142,000 of wages. Higher incomes pay nothing more into the system. Options: a) increase the tax rate that everyone pays; b) tax wages above the $142,000 current cap. Both are viable. My theory is that we probably need some combination of the two to be part of the solution. (1, 2 & 7)
- The current “full retirement age” to collect your full benefit is age 67 for those born after 1960. Lesser benefits can still be collected as early as 62. Option: Make future retirees wait longer to collect full benefits. I believe, this will inevitably be part of the solution. (1, 2 & 7)
- Everyone that has satisfied requirements to receive benefits gets their Social Security check regardless of their other sources of income and the amount of money they are earning in retirement. Option: What if your Social Security is reduced if you really don’t need the money? This is a touchy subject. If you paid in, many would say, you should get a benefit. However, others point out there is a difference between the person whose Social Security is 50 or 100% of the money they live on versus the person’s whose Social Security is only 10% of their income in retirement. Something to ponder. I see no easy answer to this one, but if Congress is looking for solutions, this is one option. (1, 2 & 7)
- Option: Invest the money in the Trust Fund more aggressively in things like the stock market to get a higher return. Maybe could be part of the solution. (1, 2 & 5)
- Option: Decreasing the income tax on Social Security income would allow retirees more spendable income. This would give retirees more money to spend and could at least theoretically perhaps lower future cost of living increases. My computer and calculator are neither / nor qualified nor capable of offering an estimate of the affect this would have. (1, 2 & 7)
My conclusion: Social Security will be different in the future. People are living longer today than they were in 1935 or even 1983. More and more people are qualifying for benefits. This is putting pressure on the system. The only way to heal the system is to change how it works. Way too many people have only a Social Security check to live on in retirement. It is unfair and inhumane to reduce the benefits people are currently receiving.
While paying more into the system or waiting longer to get a benefit from the system is not pleasant to think about, it is also not fun to realize most Americans should be saving and investing more money for their retirement.
Social Security was designed to be part of a retirement plan. Originally, it was designed to keep the disabled and the elderly out of the breadlines of the 1930s Depression. Today, it provides a subsistent level of income to those who never saved and have lived paycheck-to-paycheck. For many American couples, their future lifetime benefits from Social Security could be as much as $1,000,000. This is no small figure. However, at current spending levels, many households will spend $3 to $5 to $10M during retirement. Each person and family is different. We can help you determine your needs.
NO… Social Security is not going away. But will it be 100% of your retirement income or 30%? How much money will you need to retire? Can you afford to retire before you are eligible for Social Security? How much do you need to be saving now to retire at 67? 62? Or 55? The answers to these questions and others are what financial planning is all about. These are questions that need answers.
None of us can control Social Security. However, each of us can control how much we spend, how much we save and how long we work. Simon Sinek in his new book, The Infinite Game, talks about finite games versus infinite games. Finite games have specific rules that never change and determine who wins. Infinite games have fluid rules that constantly change, multiple players that keep changing, with objectives or goals always moving as well and of course the game never ends…thus infinite. (8)
While life is finite with lots of rules and an end that is inevitable, even if not predictable, our finances and even our legacy has the potential to be infinite. What we teach our children, grandchildren, and our impact on friends, family, casual acquaintances, total strangers and even our enemies can carry on and have an impact well after our bodies are gone. The same can be said for our finances. Many of us will be able to assist future generations to have a better life through an inheritance from us or the good works that charitable organizations we care about are able to do with our gifts Therefore, I believe that life to be the ultimate infinite game.
Wollman Wealth Designs is a financial planning and investment advisory firm with offices in Escondido Ca. We partner with single people, couples and families in San Diego County and around the country to plan their finances, accumulate wealth, and transition it to others. Call or email us to schedule a preliminary discussion about your situation. Your finances are personal. Planning for them should be as well.
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