Can Americans Really Depend on Social Security?
In 1935 the government passed Social Security into law setting up a government managed retirement plan for the majority of US workers. To fund the plan, they passed the Federal Insurance Contribution Act (FICA). The law mandates that employers withhold a portion of the worker’s salary (contribution) and requires the employer to match the contribution.
It was sold to the public as a form of annuity, with each worker’s contributions and benefits based on their income. While Social Security has features similar to an annuity (paying lifetime benefits), in many ways it is different.
In 1960 the Supreme Court (Flemming v. Nestor) ruled, “that no one has an accrued property right to benefits from Social Security.” Contributions are now taxes with an indirect correlation to benefits.
An annuity with a private insurance company is a legally binding contract. The insurance company must honor the agreement or risk being sued for breach of contract.
With Social Security the government is the insurer holding all the power.
|Social Security is nothing more than a government promise that can be unilaterally modified or broken.|
The government has made many modifications since 1935.
There is a “Social Security Trust Fund” which many feel has been raided. While there may be a fund, allegedly $2.6 trillion, it consists of Treasury IOU’s. It was great for the government when the amount of social security taxes collected exceeded benefits being paid. Today baby boomers are retiring at a rate of 10,000 per day and benefits paid exceed current taxes. The government must borrow to make up the difference – in addition to the normal government borrowing to support their deficit spending.
US government debt roughly doubled from $10 to $20 trillion from 2009-2016. Debt will continue to escalate unless there are radical changes in taxes and spending. Raising taxes and cutting spending is politically unpopular, creating class warfare, while politicians pander to their political base.
Young people today must understand what Social Security is, and is not. A portion of their salary will be taxed, with a government promise to pay them benefits for their lifetime once they retire. How much those benefits will be, when they can retire, and the correlation of benefits to their personal wealth is undetermined.
Workers will probably get something; however it’s likely the promises will be modified many times. The government will jerk them around like The Wild Mouse roller coaster before the end of their ride. Benefits are nothing more than political promises.
The negotiation games are beginning
Yahoo Finance published the First Draft of the GOP’s Plan to Overhaul Social Security. Rep. Sam Johnson (R-TX), Chair of the House Ways and Means Subcommittee on Social Security, drafted the plan and has now introduced it as a bill.
A second group chimed in:
“…Rep. Tom Cole of Oklahoma, an influential House Republican, and Rep. John Delaney of Maryland, a moderate Democrat, renewed their support for a plan to create a bipartisan, 13-member panel to recommend to Congress ways to prevent the massive trust fund from running out of money …”
Remember a camel is a horse designed by a committee. A bipartisan committee of politicians produces a camel the size of a giant blow up balloon in a Macy’s parade! It is jam packed with compromises to satisfy everyone to the point it is unlikely to come close to the original objective.
Here are highlights in the current bill in the House of Representatives:
- Gradually increasing the retirement age for full benefits from age 67 to 69.
- Adopting a less generous Cost of Living Adjustment (COLA) Formula.
- Means testing, reducing benefit payments to wealthier retirees.
- Eliminate COLA increases for wealthier individuals.
- Increase the minimum benefit for lower-income workers.
The article summarizes, “Johnson’s proposal … is little more than an opening bid in a much larger conversation about entitlement reform in the coming year.”
The government is broke and eventually changes will be made. Everyone will bear some burden of “entitlement reform.” Young workers will see higher taxes. Increasing benefits for low-income workers, benefits based on means testing and eliminating COLA adjustments for wealthier individuals is turning Social Security into a wealth redistribution program.
Inflation – the elephant in the room!
The impact of COLA changes will have major negative effects on baby boomers and retirees.
Prior to the high inflation Carter presidency, retirees had a fixed monthly check. Congress occasionally voted to increase benefits. The elderly cheered – the benevolent Uncle Sam gave them a raise. Historically the increases did not come close to keeping up with inflation.
Future inflation risk cannot be accurately calculated. During the five-year period, 1977-1981, accumulated inflation amounted to 59.9%. If a person retired on 1/1/77 and received $1,000 per month, five years later they would need $1,599 per month to have the same buying power.
Will we experience high inflation in the future? The way the government is creating trillions out of thin air, there is a high probability. No worker, young or old wants to bet his or her future financial survival on low inflation for the next several decades. Inflation is the government’s friend and stated goal. They want inflation to sneak up on seniors, unlike the double-digit increases like the Carter years.
The deck is stacked. Younger workers will find their taxes increasing and their retirement date pushed back, while seniors and savers will see reduction in the buying power of their benefits.
What’s missing from the plan?
If the Hon. Representative Sam Johnson (R-TX) wants his bill passed he needs more public appeal. How about a provision calling for immediate elimination of all pensions for current and former federal elected officials? Congress should be on Social Security, just like the rest of us. The public is fed up with the elites. Put all elected officials under Social Security and Medicare like most Americans and then address changes.
While it is fun to dream, putting congress on the same plan with everyone else is for our emotional benefit. The system is broken and expecting politicians to fix it is foolhardy.
What should all workers do now?
1. Recognize Social Security for what it is and work around it. Social Security was designed to provide supplemental income for retirees based on their income. It’s now another typical government “entitlement program” redistributing the wealth of the nation. The working class may end up with something; however the benefits will have little correlation to your contributions.
2. Maximize your savings, particularly your 401(k). Workers cannot depend on Social Security to protect their lifestyle. The proposed changes are designed to punish savers; the wealthier you become the more your benefits will be reduced.
Workers will have to go head on into the incoming tide and move forward. Maximize your savings in 401(k) type accounts – particularly if you have some sort of employer matching. You have the benefit of reducing your current taxable income and accumulating wealth on a tax-deferred basis.
3. Invest your 401(k) wisely. Having your investment income tax deferred is a good benefit but only if you grow your wealth. Don’t just make contributions and ignore where it is invested. If you need professional help to guide you, it is money well spent.
4. Increase your inflation hedge. The most buying power a retiree will have will be their first monthly check. By design, the buying power of each additional monthly check will decrease. For the “wealthy” the process will be faster.
In addition to maxing out your 401(k), continue to regularly buy gold. Only Gold provides historical gold prices. On 1/1/77 the gold price was priced at $133.77/oz. On 12/31/81 the price rose to $400/oz. During the Carter years gold almost tripled in value, appreciating well ahead of the inflation rate.
Buy and accumulate well past your normal retirement age. Your social security check will not keep up with inflation. Eventually retirees will have to sell small amounts to make up the difference to pay the bills.
5. Think before deciding to defer benefits. The government offers higher benefits to those who defer taking them when they are eligible. Making the wrong decision could cost thousands of dollars.
The decision about when to draw benefits is different for each individual. Not only do you need to “run the numbers”, realize you are making a bet with the government on how long you will live. How much do you trust the government not to change things?
6. Can Americans really depend on Social Security? It depends on your definition of depend!
Retirees need “income certainty” – having enough money to pay the bills regardless of what happens in the markets, inflation increases or any other unexpected economic changes – without having to worry. Should means testing and reduced COLA adjustments become part of the revision, income certainty will be replaced with worry. Retirees can depend on the government to send them something every month, but they cannot depend on it to continue to pay all the bills it may have covered in the past.
Note to existing subscribers: You should have already received an email with the link to the revised Guide. If for any reason, you didn’t see it, send us an email and we’ll make sure you get a copy.
On the Lighter Side
Last weekend much of the country experienced some very cold weather. Baseball fans can take pleasure in the thought that teams will be reporting for spring training in approximately one month.
I’m reminded of the quote from famous baseball player Roger Hornsby, “People ask me what I do in winter when there’s no baseball. I’ll tell you what I do. I stare out the window and wait for spring.”
Last week Congress ratified the Electoral College vote tally. Soon the inauguration will be behind us. Hopefully all the nonsense will stop. I’m seeing surveys showing the vast majority of Americans are fed up with the constant bickering and want the government to get focused on solving some of our nation’s pressing problems. Amen!
It will be interesting to see if Congress makes an honest attempt at fixing Social Security. Unfortunately the political class is generally more interested in pandering to their respective political base than working together on behalf of all the American people.
Feel free to forward this week’s article to anyone who you feel may enjoy it. When all the political melodrama is done, the ultimate solution will likely be cutting benefits, move the retirement date back and raising taxes. All generations need to understand what is going on and get serious about funding their own retirement.
As long as we are daydreaming about baseball, here’s some more of my favorite quotes:
- “Baseball is almost the only orderly thing in a very unorderly world. If you get three strikes, even the best lawyer in the world can’t get you off.” – Bill Veeck
- “A baseball game is twice as much fun if you’re seeing it on the company’s time.” – William C. Feather
- “During my 18 years I came to bat almost 10,000 times. I struck out about 1,700 times and walked maybe 1,800 times. You figure a ballplayer will average about 500 at bats a season. That means I played seven years without ever hitting the ball.” – Mickey Mantle
- “What does a mama bear on the pill have in common with the World Series? No Cubs!” – Harry Caray (Not anymore Harry!!!)
and my favorite:
- “You see, you spend a good piece of your life gripping a baseball, and in the end it turns out that it was the other way around all the time.” – Jim Bouton, Ball Four
Until next time…