Back to the Future of Social Security

With the ever decreasing world of defined benefit pensions, one of the most frequently asked questions I get is “what do you think about the future of Social Security?”

Generally, I get that question when I ask to see a Social Security statement.  When the client (or prospect) shows it to me, they inevitably joke they aren’t going to see anything from Social Security, so it’s probably worthless accounting for it.  Although I might agree (I don’t like people leaning too much on it) I want them to save appropriately on their own.   Even assuming they don’t get it, I do believe Social Security is here to stay.

The Current Problem:

Today the 2.79 trillion dollar trust fund may be “healthy” and growing. The concern is; however, the demographic shift.  Baby boomers continue to leave the work force (10,000 baby boomers will turn 65 every day for the next 19 years) and are not being replaced.  Soon, you’ll have more money being pulled out than paid into the system.

What does this mean?  The current trust fund is expected to be depleted by 2034.

Once this happens, the misperception is Social Security will cease to exist and everyone who paid in (collecting or not) will lose out.  In reality, if this did indeed happen, the estimated inflows of SS taxes would be enough to sustain 79% of what the current system is paying out.  Or, in other words, $79 for every $100 one would be currently receiving.

Interesting Facts:

• 60 million people are currently collecting Social Security.
• The earliest one can collect is age 62, while the latest is age 70.
• Every year one delays, the benefit grows 8% a year.
• Social Security not only covers retirees, but individuals on permanent disability and children under 18 who have lost a parent.
• It takes 40 quarters of coverage to be eligible; non-working spouses are eligible as well.
• 65% of beneficiary’s use Social Security as their primary source of retirement income. 36% say it provides 90% of their income, and 24% say it is their only retirement income.
• The Social Security Act was signed by FDR on 8/14/1935, the first tax collection was taken January 1937, and the first regular benefit began in 1940.
  • In 1935 the full retirement age for Social Security was 65. Also in 1935 the average life expectancy in America was just 65.
  • Nearly 80 years later, the latest full retirement age, for those born 1960 or later is 67, while the average life expectancy is 78.
• In 2016, you pay 6.2% of your first $118,500 of income into Social Security while your employer also contributes the same amount.
• Thus $7,347 is contributed by both you and your employer if you hit the full Social Security limit.
• Social Security is not a uniquely American program.  Germany in 1889 was the first country to have such a program.  Now more than 50 nations worldwide have adopted their own variations of Social Security.

The Solution in 6 ways:

Naturally, the solution is not an easy one.  Even if it were easy to answer, the political divide in our country certainly doesn’t guarantee implementation.  Here are my six thoughts on a realistic solution.

1. Tax more:  One simple solution is to increase the 6.2% tax on either employee or employer (or both).
2. Tax adjustment: Change, or totally eliminate, the tax cap (which is currently $118,500).  Numerous studies suggest if they increase the current limit to a higher threshold, you could make up an enormous amount of the gap.
3. Means test the system: In other words, if you are in a certain wealth category you either don’t receive or get a reduced benefit.  (I think this is the less likely option and my least favorite.)
4. Increase the initial age for collection:  Essentially the government can adjust the age upwards from 62.  For example, 67 could be the full retirement age. This is my favorite option, as it has a massive impact to the health of the Social Security system.  Plus, it seems the most logical based off the intent of the program.
5. Update the Cost of Living Adjustment (COLA) rider:  This is already being done to some degree.  If you simply tweaked the amount Social Security increases year by year, it has a reverberating effect on the health of the system.
6. Policy reform:  The US Government can simply allocate more resources in their budget to the program, pulling it from elsewhere.

Big Finish!

As you can see solving the Social Security problem is not a simple issue by any stretch; it will take a collaborative effort in Capital Hill.  Based on the dependency of Social Security, I see no way they are able to simply cancel the program rather than adjust its health.  So next time someone says, “Social Security won’t be around in my lifetime,” feel free to correct them, or better yet, send them to my blog!