by Peter Wechsler
President & Co-Founder, Franklin Retirement Solutions
[email protected]
First, I wanted to thank so many clients for the birthday wishes last week. One couple gave me a custom bobblehead with roses in one hand and a pile of hundred-dollar bills in the other. I received so many great cards but the one from Joyce really had me laughing hard. On the front it said, “Happy Birthday to One of the Smartest Guys I know!” Inside it said “DON’T GET TOO EXCITED. I’M FRIENDS WITH SOME REALLY DUMB PEOPLE”
I was reading The Inquirer this week like I always do when I ran across an article that sums up so many of my conversations with clients these days. When we go over questions they have, right after “Will I have enough to retire?”, the question I always seem to get is “What will happen to Social Security?” And the article I read dealt with those Social Security questions.
It seems like Social Security is always in the news. And it’s never good news. Experts keep predicting when Social Security will run out of money. For the record, it will never run out of money. Rather, we could face benefit cuts starting in 2034. Sadly, politicians keep failing to offer up solutions that will fix Social Security.
The article I read was an op-ed, and the author—Joel Naroff—used the recent shutdown over health benefits and its impact on SNAP benefits to lay out his case that the government is actively working, or is at least complicit, in letting the social safety net so many Americans depend on fail. He lists how the programs many folks rely on, including health care, food benefits, and Social Security, are failing or are set up to fail due to the actions and inactions of the government. And the one I get questioned about the most, Social Security, is the one he went deepest into detail on.
The Social Security trust fund will run out of money in 2033. That is to say, per the Social Security Administration’s own reporting back in June, the Old-Age and Survivors Insurance Trust Fund (OASI) will be able to pay 100% of total scheduled benefits until 2033. The OASI is the major trust fund supporting Social Security. Starting in 2034, while Social Security won’t go away, the benefits people receive will be reduced as the program will rely solely on the tax revenues coming in each month. Right now the estimates are that benefits would be cut 20% if Congress doesn’t fix it.
Why is the trust fund running out? They’re paying out more than they’re bringing in monthly.
How? Per Mr. Naroff’s research, in 1945, there were 42 people working and paying into Social Security for every person collecting Social Security. The trust fund swelled. By 1960, the number of contributors had dropped to about four people working for every person collecting Social Security. That further stabilized down to about 3.3 workers per collector as Baby Boomers entered the job market. Today, the ratio is 2.7:1 as those Baby Boomers exit the job market, and that’s expected to further drop to 2.2 to 1 in 20 years’ time. There is simply not enough revenue coming in to pay for all the people collecting monthly Social Security benefits.
We knew this problem was coming for decades and Congress never acted, regardless of which party was in power. The last time there was a major fix to Social Security was in 1984 when Ronald Reagan was in office. And now that the writing is on the wall, what will Congress do to fix it? That’s anyone’s guess.
In another article I read this week about Social Security, this time in Barron’s, Karen Smith of the Urban Institute was quoted as saying, “To make Social Security solvent, you either need to increase taxes, reduce benefits, or a combination of both.” She then conjectured that Congress could raise Full Retirement Age—the age in which a person can receive 100% of their Social Security benefit—above its current level of age 67. This would provide a double benefit, keeping people off Social Security longer while adding more to the OASI trust fund’s coffers from their working longer.
How they would do that was further posited by The Brookings Institution in a list of suggested reforms they released this past February. They suggested raising the retirement age, but only on the top 40% of lifetime high-earners, and they also suggested taxing more of the top earners’ income, but only on the top 20%.
What should Congress do? As we can see, opinions vary. What will Congress actually do? No one knows. When will they do something? My guess is at the last possible minute, if they don’t wait until it’s too late.
Personally, I don’t think Social Security will ever go away but I think it will be a rocky road keeping it solvent. Most likely folks younger than 55 would be most affected by any solutions Congress comes up with when and if they ever address the problem. As Winston Churchill once said, “Americans will always do the right thing… after they’ve exhausted every other possibility.” That certainly extends to Congress.
So what should you do about Social Security? Like I tell all my clients, your Social Security should be a part of a well-integrated retirement plan. It should not be your retirement plan. When you file to begin Social Security is going to depend on a lot of factors that will vary from person to person. So there is no perfect time to file for Social Security, unless you know the day and year you’re going to die, and if married, the day and year your spouse will die. Good luck with that!
Nothing like some good news to end the week. Looks like the weekend will be warmer, if not cloudy.
Hoping the Eagles offense thaws out and we get a win.
Peter