The Future of Social Security
The future of Social Security has been a topic of discussion and a playground of endless speculation for as long as most of us can remember. It’s difficult to think of another financial or political issue that has been the center of as much attention as this one. And for good reason.
What Happens if the Future of Social Security is a Bust?
Social Security is likely to be the largest income source in retirement for tens of millions of people. If the system goes bust, so do their retirement lifestyles, such as they are. The prospect of Social Security becoming insolvent is obviously terrifying to those who will be the most reliant on their retirement benefits because there IS no backup plan for them. There is no doubt that the system is in trouble. Those who claim otherwise are either ignorant of the facts, willfully blind to the facts, or are flat out lying to themselves and all to whom they make that statement.
The Future of Social Security
on America’s Wealth Management Show
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The Future of Social Security
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Dean Barber: Thanks so much for joining us on America’s Wealth Management Show. We’re going to talk about Social Security today.
Social Security has been a huge political football as far back as you, and I can remember. Going back 15, 20, 25 years in our industry, Social Security has been something that no politician dare address, or it would be a career-ending deal for them.
Bud Kasper: Yes.
Dean Barber: Right?
Bud Kasper: It was a sacred cow.
Dean Barber: Yeah, and to some extent, it still is, but I think that the writing is now on the wall that something has to be done. The question is, what’s going to be done? We go back to 2010, just ten short years ago, and we look at the Congressional Budget Office, and they described the future of Social Security as something that needed to be addressed.
They said, now this was in 2010, that under the current assumptions and current mortality tables, et cetera, that Social Security would go broke by 2039 and that all Social Security recipients in 2040 and beyond would be required to have their Social Security reduced by 20%.
Bud Kasper: Right.
Dean Barber: Now, fast-forward three years to 2013. That same Congressional Budget Office changed their forecast from 2039 back to 2031. Even today, they’re saying that by 2031 Social Security will be broke. The only money flowing into the system will be through payroll taxes and the taxes on Social Security for people in retirement and above the income threshold, causing their Social Security to become taxable.
That’s it. Under the Congressional Budget Office’s current assumptions, everybody beyond that point will be required to take a 20% reduction in their Social Security.
Bud Kasper: Right. I remember giving presentations on Social Security and financial planning where we were using, this sounds funny, slides, and it was a picture, a stick figure-
Dean Barber: Well, at least it wasn’t an overhead that you were writing on.
Bud Kasper: Well, I had that one too.
Dean Barber: Yeah.
Bud Kasper: That’s in the Smithsonian. We had on there, they had stick figures, and it showed something like 16 people, with a person on top of the table they were holding up, and that was the person-
Dean Barber: One person retired for 16 people working.
Bud Kasper: Yeah, exactly right. Then it changed to nine, and then it changed to another number, and so forth, where today, 2.1 workers are supporting all the pensioners out there have Social Security.
Dean Barber: Right. And the reality is, what has happened is we are aging far longer. People are living longer, and you have the Baby Boomer generation entering their Social Security years.
However, they’re not all there yet. I’m the year behind the youngest Baby Boomer, but there’s a mass of people heading into retirement or Social Security-claiming ages. With this news, my biggest fear, Bud, is that people will make a knee-jerk reaction, a very simple-minded reaction.
They’re going to go back to what our industry has tried to train people to do for decades, which is don’t even count on Social Security. Think of it as a bonus. Just claim it as soon as you can, and let’s make your plan without even considering Social Security.
You and I were taught that, and our industry is still teaching people that, and it’s a sin. It’s horrible because that is so not the way that it should be done.
Bud Kasper: It’s incredible to me when I go back in my memory, specifically if we go back and look at 1995, ’96, ’97, ’98, ’99, we remember how strong the market was. Double-digit returns consistently for five years. And at that time, if I brought up Social Security to someone who was getting near that age, there was an, “I don’t care about Social Security. I’m going to give that to the kids,” or “I’m going to bequeath it to my church,” or whatever the case may be. It was just a non-event.
Dean Barber: Right.
Bud Kasper: Now, we look at it from a financial planning perspective, and it can be a significant part of the income.
Dean Barber: Well, we think of it as the foundation. Because, not only is Social Security a guaranteed source of income, reduced by 20% or not, it’s still a guaranteed source of income. If you do it right, there are some significant tax benefits to properly planning your Social Security as well.
So, I still believe that even though we’re in this period, and I think that it’ll be fixed, I think it’s going to be fixed through several different means. We’ll get into talking about what those ways are, but I think when we’re making the assumptions for people heading into retirement within the next five years or so, we need to assume that Social Security will be reduced by 20% in 2031.
Dean Barber: So then that begs the question, does that mean you should go out and claim Social Security as fast as you can so that you can get as much out of the system before it reduces by 20%? No, it does not.
Okay, so let me give you just a simple scenario. If you take Social Security at 62 versus your full retirement age, you will get 75% of your full retirement amount. Okay?
Bud Kasper: Right. So, in other words, you lost 25% of your highest potential.
Dean Barber: Of your maximum amount.
Bud Kasper: Right.
Dean Barber: Now, if that 75% in 2031 is reduced by 20%, 20% of 75% is 15%. Now all of a sudden, we have 60% of what our maximum benefit was going to be. So, let’s run that assumption, and let’s take one that is one of maybe 400 or 500 different iterations on how you and your spouse can claim Social Security.
We will assume that Social Security will reduce by 20% in 2031 and see which claiming strategy is right. Choosing the right Social Security claiming strategy is as critical today; in fact, I may even say it’s more critical today based on what we know coming out of the Congressional Budget Office.
Here’s the thing. Many of you don’t have a plan for how you’re going to claim your Social Security. You need to have that plan. If you’re within five years of trying to claim that Social Security, you need a consultation. So, click here for a complimentary consultation. Let’s sit down and talk about how we do what we do. We will discuss how we help you make the right Social Security claiming strategy for your personal situation.
Bud Kasper: How many times have we talked about” control what you can control”? Especially in retirement, especially in comprehensive financial planning, Dean.
Dean Barber: I want to talk about Americans and what we were promised under FDR. We were promised Social Security.
Bud Kasper: Yep, in 1935.
In 2010, the Congressional Budget Office said that by 2039, Social Security would be out of money and only be able to be funded by payroll taxes. Taxes on people’s Social Security, who are above the income threshold in retirement, where part of their Social Security becomes taxable, causing every single Social Security recipient to get a 20% reduction in their Social Security checks. The Congressional Budget Office has moved that timeline up to 2031, 10 short years from now.
By 2031, the Congressional Budget Office is under current assumptions under the current Social Security tax, et cetera. We now have an issue wherein 2031, that Social Security will be broke. And every single Social Security recipient will be forced to take a 20% reduction.
These politicians have had a long time to deal with this, but it’s been a political football. If you dare talk about Social Security, you’re lambasted by your opponent.
Bud Kasper: Yeah.
Dean Barber: Right? You want to take food off the table of those people who worked hard. You want to kill senior citizens. You want to, I mean, it’s ridiculous. We have to take care of the problem now, Bud. We have to make far more drastic adjustments to the system than we would have had we started making gradual adjustments ten years ago.
Bud Kasper: Right. And if you look at it from the beginning, when Social Security was supposed to kick in, when a person turned the age of 65, but life expectancy back then was 64.
Who’s winning here? Right. And quite frankly, how do you build a surplus? Well, boy, you build it under that kind of a situation.
Dean Barber: Back in 2010, the CBO said that if we were to increase payroll tax, by 2%, 1% on the worker, 1% on the employer. If we had done that starting in 2010, we would have seen Social Security solvent way into the future. They haven’t done it. So now what do they say? Well, maybe we got to increase it by 3%, one and a half percent for the employer and 1%, 1.5% for the employee.
Oh, by the way, they would’ve eliminated the amount of wages that the Social Security tax applies to. That’s actually in Biden’s economic plan is taking that amount. Once you earn a certain level, I think his is at like $400,000; anything above $400,000 starts being taxed on Social Security. Well, that’s going to affect the individual at that time and the employer because the employer is still going to have to make a dollar for dollar match on that.
So it’s going to take money out of the system today that spurs economic growth, because regardless of who’s in office, Democrat or Republican consumer spending makes up 70% of our GDP. And so if we’re taking more money out of the consumer’s pocket for these other things, then guess what? Yeah.
Bud Kasper: That’s a crazy kind of world. You’re so right. Why didn’t people do the 1% increase, let’s say 20 years ago? Why? Because they were afraid, they wouldn’t be elected if they were going to do that.
Dean Barber: Political suicide is what it was political suicide. So, the fact is today that we know that Social Security in its current form is in peril.
There are problems, and you have to. If you’re going to be claiming Social Security in the next few years, you must adequately understand and apply Social Security to your retirement more now than ever.
We started talking 2008. So 12 years ago about how to properly claim your Social Security then, an average couple that was 62 years old had over a thousand different iterations on how they could claim their Social Security. Now, some of that changed.
There were some law changes in Social Security a few years back. Now the average couple aged 62 can have somewhere North of 600 different iterations on how they can claim their Social Security. But regardless of whether it’s a thousand iterations or 600 iterations, we know today that the difference between the proper claiming strategy and the worst claiming strategy can often exceed $100,000 of additional lifetime income. So don’t be fooled with what’s happening with Social Security into just saying, well, if that’s the case, I better claim it as soon as possible.
Bud Kasper: You’re right with that. There’s financial pressure everywhere. There’s a fundamental thing, though, that happened, Dean and we were talking about, sometimes I think the radio show ought to be recorded on the comments we make in between the segments rather than what we do on air. But the reality is, we had a fundamental change. I don’t know if I can put a year on this. Maybe you can help me with that when we started getting more and more of the two wage-earner families.
Dean Barber: That would have been in the early 80s. It was the age of the boomers coming out of college. So, the late 70s, early 80s, would have been the beginning of that.
Bud Kasper: So I made a notation myself because that’s that created what? Financial pressure, not when it was happening, but into the future, for Social Security, because now what do we have? We have people going in now, granted you have another person contributing, through the FICA tax, into the Social Security benefit.
We also know we have a couple now, not just the breadwinner, generally the man back in the earlier years, that now will be claiming Social Security. There are so many iterations when claiming Social Security. You have to understand in doing it properly, and you can’t do it blindly because it has to be brought in, in context to the overall retirement plan.
Nothing has changed from the prospect of how we need to develop the plan, but it has changed how we got to factor in what the government doesn’t fix Social Security? We have a reduced amount that we have to factor in.
Dean Barber: And, let’s not forget Bud, that the money that’s in the Social Security system, it’s yours. You paid for it and didn’t have a choice. You had to contribute to Social Security, and your employer had to make a dollar for dollar match on your contributions to Social Security. So it is your money. What we’re talking about is a gross mishandling by our federal government of your money. It’s also a failure to address the issues that are now at hand.
Bud Kasper: So, let me sidebar here for just a moment, because I read a report yesterday that $290 billion out of The Fiscal Stimulus plan that we just put into effect with this, with the COVID-19-
Dean Barber: The CARES Act.
Bud Kasper: Yes, $290 billion has not been distributed. $290 billion. You talk about government inefficiency! Now, what are we going to do? Are we going to bring up another one?
Dean Barber: So what are you going to do?
Bud Kasper: I’m going to claim my Social Security soon as I can.
Dean Barber: No, how do you make your decision on Social Security? Do you ask your coworker what they plan to do? Maybe you should ask your cousin or your uncle! Or perhaps we can have a seance and summon grandma from the grave since she sees all, and she can tell us.
Bud Kasper: [spookily] “Dean, take your Social Security…”
Dean Barber: “As soon as possible!” or better yet, ask your wife because she already knows she’s never wrong!
Bud Kasper: Oh, boy, why do I feel the need to duck?
Dean Barber: Because I know your wife! What you need to do is contact us now for a complimentary consultation. Not only do we understand what’s happening with Social Security, but we can also show you the very best claiming strategy for you and your spouse’s financial situation.
All you have to do is click here and fill out the form. We can meet with you virtually through Zoom, we can have a phone call, or we can meet face to face.
Don’t ask your cousin, your wife, your uncle, or summons up grandma. You need to get the right answers, get a complimentary consultation.
Also, don’t miss the article we’re discussing today, The Future Of Social Security.
Bud Kasper: Eighty-five years ago, in 1935, Social Security was established, but it’s changing every year.
Dean Barber: Get it right. The Congressional Budget Office is now saying that by 2031, the Social Security system will be broke. The only money flowing into the Social Security system will be from payroll taxes, your FICA tax. By the way, that is your contribution, and your employers are forced to make a dollar for dollar contribution. That’s one area money flows into the Social Security system.
The second area is the means testing, which is the taxability of Social Security above a certain threshold called provisional income, and that’s when you’re retired. If your provisional income is too high, then up to 85% of your benefits are taxed. That then goes back into the Social Security system as well. Those would be the only two methods where the money is flowing into Social Security following 2031, forcing all retirees or all Social Security recipients at that time to take a 20% reduction in their benefits.
And I’m afraid that is it’s causing people to say, “Well then I should just claim it as soon as possible.” But that’s not the right idea because if you claim it as soon as possible, you’re automatically taking a 25% reduction in your PIA, which is your primary insured amount. If that’s reduced by another 20%, now you’re only getting 60% of what would have been your full benefit amount.
Yes, you have to build your plan based on the fact that it may be reduced but then when you do that. However, you still have to consider the over 600 different iterations that a couple can have when claiming Social Security. You apply that same 20% reduction to every strategy to determine which approach is the best.
Bud Kasper: Right. And when Dean says iteration, he means choices with that. But you know who’s to blame for this? The fact that we may have a-
Dean Barber; Our politicians.
Bud Kasper: Yeah. But let me bring this up.
Dean Barber: Or is it the public because we voted, we keep voting those same politicians back into office?
Bud Kasper: Yes. I think that is ultimately the right answer. Since 1941, the Social Security board of trustees has required that they report to Congress. Since 1941. Now, who’s on that board? Well, listen to this. You have six members, the Secretary of the Treasury as the managing trustees, the Secretary of Labor, the Secretary of Health and Human Services, and the Commissioner of Social Security, plus two public trustees appointed by the president and confirmed by the Senate. So you’ve got people here who are knowledgeable, who are not addressing the issue.
Dean Barber: They’ve sounded the bells, Bud, but they can’t make the rules. They can’t change the laws. For laws to change, it has to come through the House and Senate and be signed off by the president. Yes, people can sound the alarm, and they’ve been for well over a decade, but nobody’s listening because why? Because it’s political suicide.
Bud Kasper: That’s right. And it’s got to be somebody to step up. So, we don’t have a choice, but this must happen. Oherwise, we’re going to have a war on our hands with people saying, “You’re taking away our benefit that we paid into and was promised to us.”
Dean Barber: Right. Now, I’m not going to get to all these, but there must be 30 plus different alternatives that the congressional budget office has come out with to fix the system. I’m just going to read a few of these.
Bud Kasper: I want to give credit, where credit is due, because your brother Shane wrote that article on October 16th of this year. So it’s up to date from that perspective. It’s excellent reading. And you know what? It’s a read that every one of our listeners needs to go in and look at. Why? You’ve been participating.
Dean Barber: It’s your money.
Bud Kasper: You need to understand what’s going on here.
Dean Barber: It’s your money. Think about it this way, if you are making contributions to your 401(k) and your company was making a dollar for dollar match and all of a sudden, they said, “You know what? We screwed up.”
Bud Kasper: We got to take the match back.
Dean Barber: We’re just going to take 20% out of it when you take it out. Really?
Bud Kasper: Yeah, right.
Dean Barber: No.
Bud Kasper: Well, don’t worry, it’ll only come out of our portion.
Dean Barber: Exactly, exactly. Here are a few of the options the CBOE he has laid out:
- Increase the payroll tax by two percentage points over 20 years
- Increase the payroll tax by three percentage points over 60 years
- Eliminate the payroll tax maximum
- Tax covered earnings above the taxable maximum and don’t increase benefits
- Tax covered earnings over 250,000 and don’t increase benefits
- Adjust the earnings on the AIME formula to prices
- Tax all earnings above the taxable maximum at 4% and don’t increase the benefits
- Tax all earnings above 250,000 at 4% and don’t increase benefits.
- Reduce the PIA factors by 15%,
- Reduce the top two PIA factors by one third
- Index initial benefit changes to longevity
- Reduce all PIA factors by half a percent annually.
- Lower the initial benefits for the top 70% of earners
- Lower the initial benefits for the top 50% of earners,
- Index the bend points in the PIA formula to prices.
The list is enormous on what choices have been laid out by this group. And yet what’s been done?
Bud Kasper: Nothing.
Dean Barber: Because you know what? Any of these things are going to impact somebody else negatively.
Bud Kasper: And what do they do? Nothing. The same thing we’re going through with the election right now, they will go to the wealthy. The wealthy shouldn’t get this. They have so much money. It doesn’t matter. Well, the wealthy put in the same dollar amount as you did.
Dean Barber: And probably more.
Bud Kasper: And probably more and therefore, don’t suddenly penalize people who had the success in their lives and make them pay the price for the government’s inability to do the right thing at the right time.
Dean Barber: Right. The reality is its total mismanagement of the Social Security trust fund. The finger needs to point squarely at Congress. Maybe it comes back to the American public for voting for the same people who aren’t taking any action.
Bud Kasper: And this isn’t a Republican or Democratic issue, folks. It is a governmental issue that was never handled in the right way. When you think about the compounding effect, if we would have addressed this just 20 or 25 years ago, with a little bit of pain there, there’d be a lot less pain that will be coming up in the future.
Dean Barber: Remember, they have made a couple of adjustments now. They increased the full retirement age from 65 gradually to 67. That was one thing that they did. They also changed some of the special claiming options that you used to be able to do by eliminating some of those. However, we still have the same problem.
Why? They’re not increasing revenue going into the system, and they’re mismanaging the money once it’s there. What does that mean to you, the individual that is pouring dollars into this every single year? It means the money you’ve been saving and the money your employer is required to match is in jeopardy. By 2031, there will be a 20% reduction in everybody’s Social Security without change to the system. That doesn’t mean you need to claim as soon as you possibly can.
I think that’s probably the biggest mistake that you can make. You have to understand every single claiming strategy you have available to you and then assume that strategy will be reduced by 20% in 2032. That’s the key. But you can only do that after you’ve completed a comprehensive financial plan because you have you are going to get, and how does it impact your ability to do everything you want to do? We can help you. We can help you understand that and put it into context. It starts with a complimentary consultation.
Bud Kasper: When you think of the amount of debt that the country has now with COVID-19 amplifying, we have to face this potential debt sooner rather than later. It’s just putting more pressure on our country regarding the amount of money consumed by this.
Dean Barber: Right. And don’t be fooled into thinking, “well, they’ll just print more money.” I don’t think that’s going to be a case. There’s going to be some difficult decisions made. You need to make your decision, and we can help with a complimentary consultation.
So there’s a deeming rule in Social Security. The deeming rule means that once you have applied for Social Security and 12 months has elapsed, you are deemed to have filed for your benefit, and you are locked in. You can’t make a change after that.
It used to be that you had a do-over, at any given point in time, send back the money, your benefits would then increase. From that point forward, you could suspend into the future, up to age 70. However, they changed that rule a few years back, and now you have one year from the time you initially claim your Social Security to change your mind. Otherwise, you are deemed to have filed for all you’re eligible for, and you’re stuck.
Bud Kasper: I’m thinking back, I can only think of one time, one time that I had a client that did that. Have you?
Dean Barber: I have a few, yeah.
Bud Kasper: Yeah. It’s just so obscure. Nobody wants to give money back. Well, by the way, at least you understand that that person was thinking forward at that time and realizing that the benefit would be to pay it back and then stall until we get to a higher amount than they’d received.
Dean Barber: I had an instance, Bud, of an individual who had started claiming at 62. He was an airline pilot, so they’re forced to retire at 60. At 62, he claims his Social Security and then winds up getting bored and winds up going back to work, I think, at 64. So his earnings were enough that it made his Social Security check be zero, so effectively it was in deferment.
Now at this point, the full retirement age was 66. So at age 66, the earnings test for this particular client goes away. If you’re at full retirement age, you can claim Social Security, make as much money as you want, and it doesn’t affect your benefit. If you earn above a certain level before full retirement age, somewhere around the $15,000 mark, every $2 you earn above reduces your Social Security check by $1. In other words, his check went away.
At age 66, he was still working and planned to work for another two to three years because he was enjoying what he was doing. He was making good money. I told him, “Look, here’s what you want to do. You want to go into the Social Security office, and you want to suspend your benefit. Tell them that you want it to stop. Because at 66, you’re going to start getting a check again and guess what’s going to happen? 85% of that check will be taxable on top of the income you tab right here. Here’s what it’s going to do to your tax bill. It’s going to be all for naught.”
So he says, “All right, that’s a good idea. That’s what I want to do.”
So he goes into the Social Security office and tells them what he wants to do. Do you know what they told him? “You can’t do that.”
Bud Kasper: “Can’t be done.”
Dean Barber: “We can’t do it.” He walked out of the Social Security office in despair. He calls me up while he’s in the parking lot, and I said, “Look, go back in. Let’s get to a supervisor of the person that you were talking to.”
So we get to a supervisor. I talked to the supervisor, told him what we want to do. He said, “I don’t think that’s possible.”
I said, “Who’s above you? Let’s talk to them.”
So then we talked to the next person above that, and lo and behold, the guy goes, “Oh yeah, yeah, yeah. You can do that.” So finally, we got it done. Long story short is that it made a huge difference in his tax bill, but a vast difference in his future benefits. The person sitting at the desk at the Social Security office didn’t even know he could do that.
Bud Kasper: It’s probably a rarity, or this might be the black swan of the Social Security claiming strategy that was there.
Dean Barber: The point is though, Bud, every single couple 62 and over, can claim their Social Security in about 600 different ways. Some a little more, some a little less, depending upon your earnings history, et cetera.
The difference between the best and the worst claiming strategy with the full benefits the way they are today is often going to be an excess of $100,000. Well, guess what? We’re talking about the fact that in 2031 Social Security system goes broke, and now what? There’s a 20% reduction across the board. So does that negate the need to claim your Social Security properly?
I say not only no, but heck no, it increases the need to claim your Social Security properly. You have to apply that same 20% reduction to every single claiming strategy to determine which one will be the best.
Bud Kasper: If the extension of the full retirement age to 67, what does that do? It allows for collecting more money before it would be claimed with the full amount of the associated benefit. Once again, it’s coming on the back of who is paying that price for not getting to the money earlier than age 67.
It’s a flaw in the system. This is how they’re addressing the lack of income that they have to support it by extending it out two more years so you can’t get to it. By the way, if you look at that 67 full retirement age, I don’t know about you, Dean, but with the people that I work with, a lot of them have said, “I’m done. I can’t work anymore.” It could be physical. It could be mental, whatever the case may be, but they’re not going to work anymore. Now, if they want full retirement benefits, they can’t. They’ve got to extend that until age 67, depending on their age.
Dean Barber: Well, that’s the story, Bud. Though it’s called some personal responsibility, understanding how this system works and building the rest of your retirement plan around this system is critical to truly living your one best financial life, which is our theme. It’s helping you live your one best financial life. By the way, if you haven’t had a chance to listen to The Guided Retirement Show, which is a podcast, I encourage you to listen to episode 34 of The Guided Retirement Show on your favorite podcast app, YouTube, or here. I interview a couple of Social Security experts, one a retired Social Security team member there, Marc Kiner, and Jim Blair, all on episode 34.
Bud Kasper: You know, Dean, I’m glad you brought that up because I think people need to understand that we do this radio show every week, we’ve been doing it for 15 years or whatever the number, we’re the longest-running financial planning show in the marketplace. Yet, here is another avenue for you to be able to enjoy and learn from our team.
Dean Barber: I want you to understand that you can experience the clarity of your financial future, putting you in control and ultimately giving you confidence in your overall situation.
We can walk you through The Guided Retirement System™, understand what we do, how we do it, and what it will look like, and what the results could potentially be.
We do that through a complimentary consultation. We can do a phone call, or we can meet you in person, whatever you prefer. All you have to do is click here and request a complimentary consultation. Let’s get some clarity into your financial future.
Bud Kasper: I want to give our listeners the opportunity to experience that Guided Retirement Show and the podcast. I credit you, Dean. Through your leadership, we continue educating people by bringing in other outside experts on subject matters that always relate to comprehensive planning. I encourage you to check the podcast out.
Dean Barber: Well, and the beautiful thing about The Guided Retirement Show is we get to do it without commercial interruptions.
Bud Kasper: That’s right.
Dean Barber: You get to have a lot more in-depth discussion. So yeah, check out The Guided Retirement Show, and when you get out there, share it with your friends, share it with your relatives, your coworkers, whatever. Please give us a like, follow us, and make sure you catch every episode of The Guided Retirement Show.
This whole idea that Social Security is in trouble shouldn’t come as a surprise to anyone listening if you’re paying any attention to what’s going on in the news. The question becomes, how are you going to address it? How are you going to make your decision? Don’t let it be that you’re going to ask a coworker or a relative or somebody else who already claimed their benefits. Even though your wife may know everything, she probably doesn’t have the right answer here. You get it from us. Bud’s laughing because he knows exactly what I’m talking about.
Bud Kasper: I’m not touching that with a 10-foot pole.
Dean Barber: My wife’s not listening, so I’m in good shape.
Bud Kasper: Good for you.
Dean Barber: Click here to get that complimentary consultation. We appreciate you spending part of your day with us here on America’s Wealth Management Show. I’m Dean Barber, along with Bud Kasper. We’ll be back with you next week. Same time, same place.
Will Social Security Go Broke in the Future?
But is Social Security actually going to go broke? Will those we’ve elected to serve us in congress finally take action to shore up the system, or will they make their best impression of Wallace Hartley and his eight-member band and play as the Titanic sinks?
We don’t know the answer to that question, but I do have a theory. I first posited this theory in an article I wrote almost exactly seven years ago titled Assessing the Future of Social Security. In that article, I noted that Social Security has been known for years as the 3rd rail of American politics. Touch it, and your political career dies. But my theory is that, due to the impending crisis in the Social Security system, NOT touching it (i.e., fixing it) will become the new 3rd rail, which will kill your political career. Judging by the promises being made by some politicians this year, my article probably never made it to Washington D.C.
Unfortunately, Not Much Has Changed in Seven Years
It’s been interesting coming back to this subject in detail and realizing that not much has changed over the last seven years, including the projected date for the depletion of the Social Security Trust Fund. Here is the first section of my 2013 article. Take a look, and then we’ll talk about some of the issues affecting the system.
In July of 2010, the Congressional Budget Office (CBO) published a report entitled Social Security Policy Options, which described the future of Social Security, the trust fund, and potential changes to the law, which would ensure its viability over the next 75 years.
Under the current assumptions, the report stated that the trust fund would be depleted by the year 2039 and that payments to current and future recipients would need to be reduced by about 20% the following year and in all subsequent years.
From 2040 on, the only funds available to pay benefits would be those flowing in from payroll taxes and taxes on Social Security benefits paid to wealthier recipients under the provisional income rules, which govern the taxation of Social Security benefits based on other sources of income.”
In September of 2013, three years and two months after the Social Security Policy Options report publication, the CBO published a report entitled The 2013 Long Term Budget Outlook. Over 100 employees at the CBO compiled the report under the direction of Director Doug Elmendorf, who appeared before the House Committee on the Budget to discuss its implications for our economy.
The report contains a section dedicated to Social Security and its sustainability, which states that they now project the trust fund will be depleted in 2031, a full eight years sooner than previously thought and less than 18 years from today.
What About Today?
Today, the CBO is still projecting that the Social Security Trust Fund will be depleted by 2031 – now just ten years away. So things haven’t changed, which also means they haven’t gotten worse. But they haven’t gotten better either. Why? Well, there are several reasons, but two that stand head and shoulders above the rest. The first reason is simple demographics. We are an aging society, which means more and more people come into the Social Security system, with fewer people paying into the system to support it.
Social Security Coverage was Expanded Beyond Intentions
Consider this, since its inception 85 years ago, in 1935, Social Security has become the single largest expenditure for the Federal Government. Social Security was designed to cover a far smaller group of people than it has been expanded to cover, and those people had a life expectancy far shorter than those covered by the program today.
In 2010, roughly 50 million people were receiving Social Security benefits. As of September 2013, 57 million people were receiving them. Now, as of June 2020, 64 million people are receiving Social Security benefits.
Life Expectancy is Longer Today
When Franklin Roosevelt signed Social Security into law, the average life expectancy was 64 years, but the earliest you could begin receiving Social Security payments was age 65. In 1950, 16 workers were paying into the system for every retiree receiving benefits.
By 1960 there were just five workers per recipient. Today there are less than three workers per recipient. The Commission for Fiscal Responsibility projects that by 2025, there will be only 2.3 workers for every Social Security recipient, and the SSA projects that by 2040 there will be 2.1 workers per recipient. You don’t need to be a rocket scientist to know that that path is unsustainable.
Difficult Conversations Need to Be Had
Clearly, something has to change. And we have to ask ourselves some very difficult questions and answer those questions honestly, using facts, logic, and simple math. Any inclination to introduce emotion or political dogma into the equation should and must be unilaterally dismissed. After all, its emotion and political dogma that has gotten us into this position. It would be the very definition of insanity (doing the same thing over and over and expecting a different result) to suggest that those things will get us out of this position. They can’t, and they won’t.
Since its inception, the system has expanded exponentially and covers far more people than it was ever designed to be able to cover. This is the other glaring problem and one that we must deal with substantively. The trend has been to continue to expand the program, spending more and more money without making any adjustments to the way it’s funded or the age at which one becomes eligible for benefits.
Many Recommendations Over the Last Decade
The CBO and the Commission on Fiscal Responsibility and Reform have done exhaustive research and analysis of the Social Security system to determine the best way(s) to shore up the system. To date, they’ve largely been ignored. I’ve written about their suggestions several times, including in my article from 2013. Though the numbers and dates change depending on when the calculations are run, here’s a partial list of the potential changes recommended over the last decade.
Let’s look at some of the changes which have been proposed:
Suggestions By the CBO:
- Increase the payroll tax rate by 1 percentage point immediately.
- Increase the payroll tax by 2 percentage points over 20 years.
- Increase the payroll tax by 3 percentage points over 60 years
- Eliminate the payroll tax maximum.
- Raise the taxable maximum to cover 90% of earnings.
- Tax covered earnings above the taxable maximum and don’t increase benefits.
- Tax covered earnings up to $250,000 and don’t increase benefits.
- Index earnings in the AIME formula to prices
- Tax all earnings above the taxable maximum at 4%, don’t increase benefits.
- Tax all earnings above $250,000 at 4%, don’t increase benefits
- Raise from 35 to 38, the years of earnings included in the AIME
- Reduce all PIA factors by 15%
- Reduce the top two PIA factors by 1/3.
- Index initial benefits to changes in longevity
- Reduce all PIA factors by ½% annually.
- Reduce PIA factors to index initial benefits to prices rather than earnings.
- Lower initial benefits for the top 70% of earners.
- Lower initial benefits for the top 50% of earners.
- Index the bend points in the PIA formula to prices.
- Index earnings in the AIME and bend points in the PIA formula to prices.
- Replace the current PIA formula with a new two-part PIA formula.
- Modify the special minimum benefit and index it to growth.
- Introduce a new poverty-related minimum benefit.
- Enhance low-earners’ benefits based on the number of years worked.
- Raise the full retirement age (FRA) to 68.
- Raise the FRA to 70.
- Index the FRA to changes in longevity.
- Reduce the COLA by ½% percentage point.
- Base the COLA on the chained CPI-U.
Suggestions By the Commission on Fiscal Responsibility and Reform:
- Make the benefit formula more progressive by modifying the current three-bracket bend point formula to a more progressive four-bracket formula.
- Provide an enhanced minimum benefit for low-wage workers.
- Enhance benefits for the very old and the long-time disabled with a 20-year benefit bump up to protect those who have outlived personal savings.
- Gradually reduce early (EEA) and full (FRA) retirement ages based on increases in life expectancy. The FRA would reach 68 in 2050 and 69 by 2075 while the EEA would increase to 63 and 64 in the same years.
- Give retirees more flexibility in claiming benefits, and create a hardship exemption for those who cannot work beyond 62.
- Gradually increase the taxable maximum to cover 90% of wages by 2050.
- Use the chained CPI to calculate the COLA for benefits.
- Cover newly hired state and local workers after 2020, thereby forcing those employees to participate in (and pay into) the Social Security system.
- Begin a broad dialogue on the importance of personal retirement savings.
Politics Aside, Social Security Needs to be Addressed
There is no shortage of good work in trying to solve the problems faced by Social Security. The only shortage is in the number of lawmakers who have so far taken this work seriously. Today, listening to some of our politicians’ promises, you’d think the system was fully funded for the next 100 years. They want to expand the system even more. Yet again not addressing the funding mechanism or the age at which people are eligible for benefits. As I’ve stated numerous times, we must shore up the system before expanding it further. If we don’t, we’re ensuring and accelerating its demise. There’s no getting around it.
So would any of the proposed changes make a substantial difference? The answer is yes, if. If we don’t expand the program further, for the time being, there are several of these that will make a dramatic difference in the sustainability of the system. However, many may not like the effects that some of them have on their long term purchasing power with their benefit dollars.
Change the COLA Calculation
For example, tying cost of living adjustments (COLAs) benefits the Chained CPI-U, rather than using the existing CPI-W. The chained CPI-U, which measures increases in urban inflation, increases at a slower rate, generally, than the CPI-W, which measures growth in nationwide wages. Moving to this system for calculating COLA’s would reduce the outlays for the Social Security system and increase the revenue.
The following chart was in the CBO report/testimony “Using the Chained CPI to Index Social Security, Other Federal Programs, and the Tax Code for Inflation” on April 18th, 2013. Though it’s seven and a half years old, the data is still relevant and speaks for itself.
FIGURE 1 – CBO.GOV
This one simple change would result in a $340 billion reduction in the deficit over the ten years following its implementation. And while it’s not enough on its own to fully fix the long-term solvency of the Social Security Trust Fund, it’s a pretty big step in the right direction. The long term result is that scheduled benefits would be approximately 48% lower than currently projected benefits sometime around 2060 or shortly thereafter. Since the people who are scheduled to begin receiving those later benefits, those born around 1993 and later, are not thinking about Social Security today, this proposal would likely not face much pushback from them.
Change the Full Retirement Age to 70
Another relatively simple change to the system would be to gradually increase the eligibility age full retirement benefits to 70. As the only change, it wouldn’t have a dramatic effect on the system. However, the change would still be meaningful when combined with other options, such as raising the amount of income subject to the payroll tax, increasing the payroll tax marginally, and using the chained CPI-U discussed in the last paragraph. Penn Wharton has a very cool interactive charting tool on their website that allows you to see the effects of various changes on the Social Security Trust Fund’s long-term solvency. I’ve run a lot of multiple what-ifs on there. I’ve attached it below to show you what could happen if we took some simple steps to shore up the system for future recipients. Take a look.
FIGURE 2 – Source: Penn Wharton
Four Changes Could Result in Long-Term Solvency and Future of Social Security
Note that four changes result in the long-term solvency of the Social Security Trust Fund for the future.
- Increasing the payroll tax to 13.6%
- Increasing the maximum taxable income to $150,000
- Using the Chained CPI-U
- Raising the Full Retirement age to 70
If the long-term solvency of Social Security is what we’re looking to achieve as a country, shouldn’t we discuss this? Shouldn’t we be honest with ourselves? Shouldn’t our politicians be truthful that we can’t in good conscience continually expand a program that’s on the verge of collapse?
The reality is that this country’s demographic trends are the straw that threatens to break the camel’s back. We have about 78 million baby boomers, the youngest of whom is currently 55 years old. They’re all barreling into retirement at the rate of 10,000 per day for the next ten years. They are going to be in the system for the next 30 to 40 years. Gen-X, the generation that follows, is only about 55 million people. Gen-Y or the Millennials come in behind them ~80 Million strong.
The Future of Social Security Requires Hard Work and Difficult Discussions
So, life expectancy, which is ever-increasing, is going to become an issue at some point. If what many medical pioneers in the aging prevention field claim is possible, and our average life expectancy exceeds 100 years over the next decade, we’d have a lot more work to do on this program, I fear.
However, for now, if we can begin the hard work of having difficult and honest conversations about how we maintain the long term solvency of the Social Security Trust Fund, we’ll be in a much better place to face any of the potentially unforeseen issues that may arise due to medical advances and the like.
In conclusion, go and encourage your congresspeople to get out there and start touching that 3rd rail. We’re running out of time.
Have a great week,
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