Thursday, July 21, 2011

Is Social Security In Your Future?

     When I tried to figure out when would be a good time for me to start taking Social Security, and then posted an entry on the topic, I was struck by how many people wondered if they would be getting any Social Security at all.

     Terry wondered if it'll still be around in 8 years when she's ready to retire, and Morrison sighed, "I just hope it's still there."

      Joanna Jenkins warned, "Cross your fingers that there will even be Social Security by the time you're able to collect." And JBO wrote, "Since I am in the 'you may lose it' category of 53, I have no idea when or if I will ever get any. I am pretty sure people my age will take it ASAP since they have been threatened to lose it."

     The worries are not without some justification. According to this report by the Social Security Board of Trustees, Social Security is already running a deficit. And largely because the number of beneficiaries will grow at "a substantially faster rate than the number of covered workers," the Social Security Trust Fund reserves will be "exhausted in 2036." 

     Of course, predicting the financial future is even more fraught with error than predicting the weather. The year 2036 is a quarter of a century from now. As a comparison, think about the world of 25 years ago -- 1986, when there was no internet, no email, no cellphones, when the Berlin Wall was still up, and so were the Twin Towers and nobody had heard of Osama bin Laden and Ronald Reagan was president. A lot can happen between now and 2036.

     All I know is that throughout my career, watching a pretty sizable deduction come out of my paycheck every two weeks, I assumed that Social Security would be there when I finally got to retire. I did not assume Social Security would cover all my expenses -- nobody I knew ever assumed that -- but we did believe it would at least be there as a base income if things went wrong for us, or as a nice supplement to our retirement income if things went well for us.

     But now, it seems, people are beginning to wonder if Social Security will survive at all. Many Baby Boomers intend to start grabbing payments as soon as they can -- not because they're greedy, but because they're afraid that Social Security as we know it is going away, and they want to get back at least a small part of their investment before the whole thing goes down.

     It's a shame, really, that people are losing faith in Social Security, just as they are losing faith in Wall Street, the American economy, American business, their elected representatives, their governments in the state house and Washington ... in everything, really.

     But does it make sense? Just how vulnerable is Social Security? What are the chances that a 60 year old, or a 50 year old, will never see a Social Security check? What are the chances that our sons and daughters, now in their 20s and 30s, will see a Social Security payment?

    In last Sunday's New York Times Richard H. Thaler, an economics professor at University of Chicago, wrote in "Getting the Most Out of Social Security" that most people would benefit by delaying when they start receiving Social Security payments. He agrees with my own analysis in "Did you Miss Your Social Security Check?"  It's a safe, guaranteed and inflation-protected annuity, he avers, an investment that more retirees should use to provide them with a stream of income.

     He argues that Social Security is inflation protected, fairly priced and "because it is run by the government is reasonably safe." Then he goes on to say, "Claiming that Social Security benefits are safe may sound naive, but my view is actually quite cynical. I believe that as long as the elderly continue to vote in large numbers, no Congress will renege on promised payouts for those already eligible to receive benefits."

     On the other hand, Alicia Munnell pointed out in a Smart Money article called "3 Ways Your Social Security Payments Are Already Being Cut" there are existing policies in place that will mean fewer and smaller payments to future retirees. One is the increase in the retirement age, slated to go up to 67 for people born after 1960. A second "pay cut" comes from the fact that Medicare premiums, which are deducted from Social Security payments, are increasing faster than benefits, resulting in less Social Security "take-home" pay. And finally, Social Security payments are taxed under the personal income tax for people above certain income levels, and the levels are not indexed to inflation. The result:  in 2002 the median earner did not pay any tax on Social Security benefits, but by 2030, under current law, the median earner will pay tax on half the benefits.

     And Catey Hill, just last week at Smart Money, reported in "Coming Soon: Smaller Raises for Seniors" that Congress is considering a new way for Social Security to adjust benefits for inflation, resulting in -- you guessed it -- a method that produces lower estimates of inflation and thus smaller increases  in benefits. "Under the new calculations," she concludes, "after ten years, the average 73 year old would get a check that's about 3 percent smaller than he would get under the old calculations."

     Putting aside our varying opinions about what we feel should happen to Social Security, what seems most likely to happen to Social Security is that:

     1)  Social Security benefits will be there for future retirees. As Richard Thaler suggests, as long as the elderly continue to vote, Congress will be very circumspect about curbing benefits. Remember how far President George Bush got with his plan to replace Social Security with a voluntary retirement plan? Never got out of the starting gate. The Tea Partyers? They make a lot of noise, but they're nowhere near a majority. It seems pretty clear that Social Security will be around, in something very close to its present form, at least for anyone age 50 or over.

     2)  However, there are plenty of people -- Senators, Congressmen, government officials, economists -- who want to chip away at Social Security payouts as the great mass of Baby Boomers begins to apply for benefits and money starts flowing out of the Trust Fund at a faster and faster rate. They've already begun to trim wherever they can, and they'll continue to cut around the edges. They'll do it quietly, hoping that retirees won't notice too much. And they'll make more dramatic cuts for future beneficiaries, because younger people won't complain as much -- and don't vote as much.

     Who knows what natural disaster, economic collapse, or international conflict will drastically change our lives? But the most likely scenario seems pretty clear:

     Social Security will be with us for the foreseeable future. For 25 years at least, and probably more. Maybe even for our sons and daughters now in their 20s and 30s. But over time the benefits will slowly lose their purchasing power, one way or another, as they become a smaller and smaller part of our retirement income.

     Or, as we knew all along ... Social Security will be there as a bare-bones base income if things go wrong for us, or as a somewhat-less-significant supplement to our retirement income if things go okay.

   {An edited version of this article was first published on Technorati.}

8 comments:

Dr. Kathy McCoy said...

Great post, Tom. I believe your conclusion is spot on. As you say, our greatest challenge is paying attention and voting! Otherwise, who knows what could happen?


Many people I know depend primarily on Social Security after their 401K's were devastated and their home equity evaporated in the financial meltdown of 2008. The secret to a happy retirement on reduced resources is getting rid of any debt before retirement and enjoying life as is. My husband and I retired last year with considerably less money than we had planned -- thanks to the 2008 meltdown -- but we have no debts and simple tastes and so far life is good.

June said...

Well, thank you for doing that research for me!
I feel reassured.

Dick Klade said...

I think both your analysis and conclusion are right on. It's too bad our politicans have delayed so long in making minor adjustments to ensure a sound Social Security system for many more than the 25 years now projected for the present trust fund surplus to last.

All that really is needed is to remove the cap on high earnings, which now are exempt from payroll taxes, and to make an adjustment in the cost of living index. The latter change probably will be made in the next few months.

Social Security will be around a lot longer than anyone who reads this comment.

Linda Myers said...

I filed for Social Security last week, six months into being 62. When I'm 65 I'll collect a pension from the state, and my SS entitlement will decrease by half. I wish I'd thought of that last September when I could have started collecting.

schmidleysscribblins.wordpress.com said...

Great piece on SS. I was in the labor force when the discussions took place in the 1980s about saving SS by making changes in the age of full retirment, etc. I remember at the time of the agreement between RR and Tip O'Neale, that I felt I was doing the right thing, accepting the increase in taxes in my pay gracefully...not that I could do anything about it anyway.

After that point, I never had a grace period at the end of the year when I had paid all my SS payroll taxes. The government had raised the cap and I was forever stuck under it. All the changes made them have now come home to roost.

First, I had to retire owing to health reasons, before I reached the full retirement age. Then my younger sister, who has been through health hell the past few years had to retire before she reached full retirement age. Like Linda Myers, she was a teacher and her state pension is tied to the SS pension. I was a Federal worker, and changes were made to our pension scheme also (no more double dipping for one thing).

Seniors have already made some sacrifices for the changes made 30 years ago to "save" SS, and as you point out with increases in the cost of Medicare payments they will continue to make sacrifices.

Good post and timely too. Dianne

Anonymous said...

I say no changes to our SS money, I paid it for years and need every penny with the price of gas, food, medical, as I am on it due to health reason, I get caught where i can't get a supplement in Washington State, so all the rest comes out of pocket, and my pockets don't have enough in to do that, I do not smoke, drink, or go out, why do I not get enough to live without having to choice which one I go without or with. i am frugel too. March on Washington DC senior and disabilied and find a better way to avoid the down fall of us that have paid in way more than we will ever get back.......$$$$$$$$$$ I want my cost of living raise or bring the price of gas down........Get this country going with jobs and people whom pay in that helps, stop the insanity or sending things to China and Japan to be done, buy USA......

Anonymous said...

Question... how can anyone with a clear conscience allow social security to be taxed. I paid taxes my entire life. Now I'm hearing that the government is considering taxing social security. Isn't that "double taxation"?

Anonymous said...

SS is not running a deficit now. If nothing is done to change SS, it will not be exhausted by 2036, but you will not receive your full benefits after that date (Medicare is running a deficite). Changes do need to be made to SS in order for beneficeries to receive full benefits. I started receiving SS benefits at age 65 while still working. I now wish I had waited a couple of years in order to receive higher monthly payments as well as higher COLA's (cost of living adjustments). It is a shame that we must pay taxes on this benefit because we were taxed on it while working and it was being deducted from our paychecks. 85% of your SS is the highest you will pay tax on. You may pay on less than that if you are in a certain income level. Let your congressman(woman) know that you oppose any privitization of Social Security, and to make the changes necessary to keep SS solvent without harming those who currently receive it and those who will eventually receive it.