Barron's has a close look at three options to "fix" Social Security. The article touches on ideas we've been talking about here and other places for many years. A point I made in the last few weeks was that it's a good bet that whatever ends up getting done will be unpopular in that large swaths of people will feel like the fixes are unfair.
This post is sort of a list of points that I thought were noteworthy and wanted to expand upon or otherwise weigh in.
The current working assumption of when the trust fund will run out of money outflows will exceed inflows is 2034. This has been a moving target for a while. So 11 years until there is real trouble? Moving target? For a while the working assumption was 2035. The point though is there is no way this should catch anyone off guard. Whatever the true magnitude of the problem, we have 11 years to figure this out and we've known there was some sort of problem for ages. We have plenty of time to individually solve our own problem.
The article mentions the political complexity here. There are two points. One is that a politician who votes to cut benefits or raise the retirement age will probably lose some voter support. Maybe enough to lose their seats, maybe not but <skepticism coming> they care more about keeping their jobs than anything else. Another type of political complexity that exists, and this applies to many issues, is that the problems are bigger than what can be solved in one political cycle. Legislation that passes now could get repealed later. Of course there can be flawed legislation but it can be difficult to make progress.
If congress does nothing, then starting in 2034 incoming payroll taxes would cover 80% of retiree payouts implying a 20% cut. I don't know if it is that linear but that is what Barron's said.
Cutting benefits and raising taxes are the two most talked about way to fix it. Keep in mind that extending the full retirement age (FRA) to 68 or 69 or whatever is a de facto benefit cut. There's been talk of raising the cap on payroll taxes. Right now, once an earner gets to $160,000 +/- they don't pay payroll tax on further income. The working idea usually is to exempt income between $160,000 up to some higher level from payroll tax and then having it kick back in at that higher income. Biden as talked about exempting between $160,000 and $400,000. Simply raising it in blanket fashion would be a pretty big hit for someone making $200,000, paying 7.65% or 15.3% if self employed on dollars $160k-$200k.
It is generally accepted that the various ideas around extending the retirement age and increasing taxes would solve much of the problem. The last sentence is about the math involved not about the right and wrong of any of it which we'll get to.
Now comes the grim numbers about how much we have collectively saved for retirement. "Nearly half of U.S. households headed by someone aged 55 and over have no retirement savings, according to the U.S. Government Accountability Office. And many of those that have managed to save don’t have enough. The median nest egg for a family headed by someone aged 60 to 65, with household income of $71,000 to $126,000, was about $150,000" and among high income earners the median balance is $535,000.
A $500,000 balance implies a $20,000 income assuming the 4% rule. That can certainly get the job done but telling a "high earner" that anything more than $20,000/yr is imprudent will be some harsh reality. There are several proposals floating around congress to expand the program to pay out more money. Obviously that deepens the potential hole coming and creates the need to further mitigate the threat. More taxes on workers? FRA of 72? I don't know. There is a mention of adding a tax to capital gains taxes to go toward SS. I hadn't heard that one before.
Finally at the end of the article was an idea that I have been talking about for ages, like going back to the original version of this site in 2004 which is means testing. Not to be taken as my favoring that idea, I've just long thought it is inevitable and as I have also talked about, I think it will come down lower on the wealth scale than you'd intuitively think. One study cited by Barron's on this talked about a 46% means test cut for "middle income" retirees and a 67% cut for retirees with "higher wage histories." That study though talked about a 25 year implementation for that.
That's just one idea on means testing. I don't know what it would actually look like, I just think something along these lines is coming. One positive part of this means testing study is that it assumes that starting at age 62, the employee no longer pays payroll tax.
After I started to write this post I saw another article that I thought had some relevance from Yahoo. It was about various challenges or disruptions that people have in retirement ranging from health issues to unexpected expenses and other things you might expect to make retirement difficult including the psychology of retiring.
We can take action ahead of time to lower the odds of these disruptions befalling us. We've been writing about this for ages too. Things related to taking care of ourselves, pursuing varied interests beyond our day jobs through life, making a conscious effort to enhance our resiliency and optionality, finding purpose for your life and I'll add one which is figuring out how to live in the moment, that is appreciating what we have when we have it. A very undramatic example of this is all the championships that Boston teams won from 2002 until 2018 and we'll see what the Celtics can pull off this year. All four teams won with the Patriots and Red Sox winning multiple championships. That much winning was awesome but not sustainable. I appreciated it for what it was in real time. Now apply that to the important things in life like relationships, volunteer work if you do any and so on.
Circling back to the right and wrong as anyone might think about it regarding the possible changes to the Social Security program. I have no argument to make against the unfairness of possible changes or the possibility that some will view it as immoral or any other negative sentiment that people might feel. The attitude here has always been that changes will be foisted upon us, they will be "unfair" to some portion of the population. It is not realistic to think that any of us individually can change the outcome of whatever might happen. Personally, I am not going to get upset about things that are beyond my control. It is far more productive to be realistic about possible changes and get to work on some sort of Plan B in case any changes do have a material impact on your situation. This is eleven years away, it's not like you don't have time to figure it out.
I'll close out referring to a couple of the comments on the Yahoo article. In the article itself, there were a couple of suggestions about working with financial advisors. The comments are always skeptical of doing so which I can understand but a couple of them pointed to avoiding advisors who don't walk the walk. Kind of like it's hard to take diet advice seriously from a doctor who is overweight, the comments were saying that advisors should have their financial houses in order which I agree with. I love the idea of that sort of accountability, it seems very Talebian.
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