"To be too certain of anything is the beginning of bigotry." -- Novelist Abdulrazak Gurnah

Tuesday, March 17, 2015

What Happens When Social Security Goes Bankrupt?

     Social Security is a program that's near and dear to our hearts. I think we all know there are some issues with the system. Maybe some of us figure we'll be long gone before Social Security runs into real trouble, so it doesn't really affect us. Others think everything is just okay the way it is, and their only concern is how to squeeze the most money they can out of the system. Still others are sure there's a government conspiracy, or a right-wing conspiracy, or a corporate conspiracy -- or some kind of conspiracy -- to deprive us working men and women of the benefits we've earned and deserve.

     I don't pretend that my own views can stand up as an authoritative voice on Social Security. So instead, I've gone to my financial consigliere, Jeremy Kisner of Surevest Wealth Management in Phoenix, AZ. He is a Certified Financial Planner and Chartered Retired Plans Specialist, with a degree in economics from UC Santa Barbara.

     I have no financial connection to Kisner (although I might be a little more flush if I did!) But last year he helped me out by penning a post for Sightings Over Sixty called Is Long-Term Care Insurance for You? Recently, I saw on his Weekly Insight a very clear, concise and straightforward analysis of how to "fix" Social Security. And so with his permission I have reproduced it here:

What Happens When Social Security Goes Bankrupt
Jeremy Kisner

     It’s a trick question. Social Security will not go bankrupt. However, if no changes are made to the current system, the “trust fund,” which was built up by collecting more payroll taxes than it paid out, will be depleted. Benefits would need to be reduced at that point to match the payroll taxes being collected. That would happen sometime between 2033 and 2037 if we do nothing. Once the trust fund is depleted, benefits would be cut to approximately 75% of their current level to keep the system solvent through 2087. The reality is this “do nothing” approach is unlikely as there is growing pressure to “fix” the system.

     So, let’s fix the system. The options are:

     1) Increase payroll taxes. This is the simplest and most effective. The current payroll tax collects 6.2% from employees (and another 6.2% from employers). This would need to be increased to 7.6% to keep Social Security benefits fully paid for another 75 years, according to a study by the National Academy of Social Insurance. It will take some cash out of workers’ pockets, which is never popular and will hurt economic growth. Imagine that…if we put more away for the future, we have less to spend today.

     2) Eliminate the cap on taxable earnings. The cap currently limits the 6.2% payroll tax to the first $118,500 of earnings. We could close approximately 70% of the Social Security funding gap if the cap were eliminated entirely. This would only affect about 5% of the workforce, who have wages above $118,500. These people may be a bit perturbed because they already have the worst return on their Social Security contributions.

     3) Raise the retirement age. This seems logical since people are living so much longer than they did in 1935 when Social Security began. Unfortunately, this solution is surprisingly ineffective. A three-year increase in the full retirement age from 67 to age 70 for people born after 1960 would only cut the funding gap by 25%.

     4) Means-testing for beneficiaries. This would mean that high income retirees would have their benefits reduced or eliminated since presumably they don’t need the benefit. Polls found this option to be highly unpopular with voters who thought it was unfair.

     The likely scenario is some combination of these options. While Congress is figuring out all of this, I encourage you to save as much as you can. After all, the maximum Social Security you can collect at full retirement age in 2015 is only $2,663 per month and I have a feeling most people reading this article will want to spend more than that.

*       *       *
     I don't know what your preferences are, but as a person who works for himself, part time, and therefore pays the full amount of the Social Security tax himself -- which is basically 15% on top of everything else -- raising the tax would be pretty punishing, a real disincentive to work at all. (Plus, remember, even if you work for someone else, the "employer's" half of the payroll tax really comes out of your pocket, not their pocket.)

     Also, the payroll tax is a regressive tax. If you make minimum wage, it takes 15% from your paycheck. If you make $50,000 a year, it takes 15% from your paycheck. If you make $250,000 a year, it takes about 7% from your paycheck. If you make more than that, it takes even less.

     So to me, the obvious solution is #2 -- eliminate the cap on taxable earnings, so everyone pays at the same rate. But like I said, I'm no authority. Maybe you have some other ideas.


Anonymous said...

You need to speak to a CPA before you speak/write about taxes. Self employment taxes are 50% tax deductible, so you are not paying 15%. Also, your withholding tax rates are incorrect:
They are NOT regressive. The more you earn, the more you pay. What you have listed is preposterous. How could a person making minimum wage pay 15% while someone earning $250K pays 7%? Ridiculous. In reality that richer person will be paying 33% if married, filing jointly.
Stop scaring us retirees. Social Security is going nowhere. It's the disability payments that are a problem because many boomers lost their jobs, can't get new ones, so go out on disability. That's the real problem: fraud.
Get a life, please. And get your facts straight.
And anyone earning over a million, now pays 39.6% in taxes. The less you earn the more you keep. That's called socialism a'la Obamaism.

DJan said...

Thanks for the article by Kisner. I think I'll go check out what more he has to say. I didn't know there is a maximum amount you can get from SS, but I do know that number is about half of what most people receive monthly. If it were not for my annuities income, I would be hard pressed to live on my SS, but it helps incredibly in paying bills and giving me a decent quality of life in retirement. Thanks for all these interesting and informative articles, Tom.

Olga said...

I think our entire economic system needs fixing. Social security is just one piece of the puzzle. That's just my humble opinion and I really don't know any answers. I hope someone does.

stephen Hayes said...

I signed up for SS and I'm now receiving checks. I could have waited longer and received more, but I figured I'd take it now before changes are made. Fortunately, this isn't my sole source of income. People forget that this was intended as a safety net, not a sole source of income.

Tom said...

Ouch. I feel like I have to defend myself. It's true that self-employed people can deduct 1/2 of their SS tax from gross income, so it does bring the rate down a bit. I plead guilty to exaggerating ... but not by much. Moreover, employees cannot take that deduction, which, in a way, if you count the employer's payment as part of compensation, suggests they actually pay more than self-employed people.

The payroll tax certainly is regressive -- which doesn't mean higher earners pay less, but that they pay at a lower rate. Everyone earning over $118,500 pays at a lower rate. The more people earn beyond that, the lower the rate. Finally, I'm just talking here about the payroll tax, not other income taxes which can indeed bump up a millionaire's rate to 39.6%. Still, I don't feel sorry for millionaires. I'd rather go after millionaires instead of working stiffs or retirees themselves to close the SS gap Kisner is talking about.

Anonymous said...

Social Security what about pensions which are being threatened daily, people put in their entire life thinking the pension will be there well it looks like that is not the case toooooo..I know about the maximum amount, my later mother in law was married to a man for over 17 years he had many businesses when he passed from this earth she got his huge monthly benefit which her kids took and had a good ole time, all cause she could not live without a warm body near her, she had 9 kids and never learned to cook, clean and live well, her money went kaput, we used to get phone calls because of it, we lived away and helped but I got the groceries and paid the bills in person never giving her real money..I know people who get the maximum and they have annuities and investments they also get, plus the maximum social security, they lived frugally but made good money, saved it and are living well now, all a matter of persepective, your adding up of the payroll taxes is wrong, I agree the payroll taxes are regressive but your calculations are way off..check your facts..You are really scaring people who don't get much at all..

Kathy @ SMART Living 365.com said...

Hi Tom! I found this post interesting and thought provoking. Obviously it can't cover every single instance of how the tax code works....so we each need to discuss our own situation with a CPA. But I appreciated hearing what some of the "solutions" are and how they might effect my own circumstances.

Meanwhile, I find it rather funny (sad funny, not hahaha funny) that some other people have commented in such a negative way. Obviously this topic brings up a lot of fear for people. Currently my husband and I are "semi-retired" and are working because we love our work AND because we appreciate the added income. We are delaying taking early SS to maximize our SS later...but only see SS as a supplement to our income--not the whole thing. We have been self-employed our entire lives and don't have kids so we have no illusions that anyone (our kids or the government) will take care of us when we age. This is not an accident. We are working and planning and taking care of it. And as high earner self employed people I agree that the best solutions for our COUNTRY (and our fellow citizens) is the #2 solution mentioned (even though it would cost my husband I more in the long run)

And while I am sympathetic to anyone who is struggling, I do believe that those of us who are still working and can plan ahead should do so and your information is helpful. Thank you.

Dick Klade said...

Good analysis. One important fact Kisner doesn't mention is that the longer Congress waits to fix the system the bigger the fix must be. Had the pols lifted the cap three or four years ago nothing more would be needed. Now, it will take some combination of the measures listed to do the complete job.

I think "Anonymous" commentators don't deserve to have their views published. Please consider removing them in the future.

Anonymous said...

I have to agree with Dick. People who say things like "get a life" and "That's called socialism a'la Obamaism" while hiding behind a curtain don't deserve a forum.

I appreciated your post and the information you provided.

Pam said...

First of all, the first anonymous person who commented needs to remember that this is your blog, Tom, and you're entitled to your opinions. I don't understand the tone and negativity of his/her remarks. I appreciate that you shared Kisner's info w/us. Thanks for your help.

Janette said...

Thank you,Tom, for writing the article. It reminds me to write my congress people! I don't have a CPA. Anonymous needs to google a bit before flying off the handle.
All of the information is on the net. Here is my understanding of the math.
You pay 6.2% on the first $118,000 That equals $7347. If you make $250,000, you still pay $7347 (the cap is $118,000 this year), bringing your "percentage of tax" down to about 2.9%. It IS a regressive tax.
Keeping in mind that this amount is half (since most of us are not self employed and our employer pays the other half). So that brings the rate to 12.4%+2.9% Medicare=16 ish percent. The person making 250,000 will pay about 6%+2.9% = 8.9 %
Since 1998 the cap has almost doubled. Should have gone up much sooner since the largest group retiring paid their significant SS in the last 20 years.
I totally agree that the cap should be taken off.
My question is, will the maximum benefit of The top people go up as well? That would totally ruin what needs to be done.

Anonymous said...

The jewish people voted in Netayanhu guess he knows how to run a country..I don't like haters who hate cause they put in anonymous comments, I think most people don't have much money for their retirements, but figure thety want to see some of their pension and social security rather than nothing at all..Most companies don't want a worker making a good wage, with benefits and get rid of them one way or another my husband found that out..I worked federal and get a teeny tiny amount, plus social security, saved like crazy but still it is a not a lot with taxes on property going up and food and gasoline, you cannot have heaven on earth at all..More like a season of hell now and then...your blog is very interesting and informative if it helps one person to save some money and live saving money it is great..ciao!

Douglas said...

First, let me say that the initial anonymous (who also responded to your own comment, Tom) is a jerk and not especially bright (as you pointed out).
Second, I failed (as I am sure most people have) to squirrel away the same amount of my pay as SS took from me. Doing that, and investing it each time I reached, say, $1000 would have provided me with a tidy sum for my "golden years." Of course, I didn't do that. My former company always tied in SS with our pension to show how generous they were and to make retirement seem a rosy reward for our devotion to the company.
It's all a farce. Stash away as much as you can as long as you can and you will much happier in retirement.

b+ (Retire In Style Blog) said...

We have done very well because our state took over public employees retirement and "required" us to participate in savings. It has been wonderful. I liked the idea of matching SS savings with our own funds. That would have been a very good thing for us.

Thank you Tom for opening up the conversations. As for Anon. I always wonder why the people that shoot from the hip choose to do it with a mask on. Sigh!

Anonymous said...

Devaluation of the dollar will fix everything. Given what's going on in Europe everyone will be devaluing their currency. Except perhaps China!

Anonymous said...

IMO, there are good reasons to use the "anonymous" identity for commenting to Blogger blogs; however, I think it only polite to other commenters to include some form of screen name in one's comment. Lacking screen names, we who comment "anonymously" get blamed for one another's nasty/nice/insightful/crazy comments.
Cop Car

Dick Klade said...

I have no problem with "anonymous" commentators who attach screen names. It's those who hide completely I have no time for.

Sheryl said...

I'm not getting into this heated discussion...except to say, Tom, thank you for posting all this important information. I'm sure your intent was to help and not to start a dialog of dissention.

Unknown said...

That is a very important take on social security; bringing forth the idea that it essentially doesn't pay for itself. However, it isn't invalid; Jeremy is right when he says that it can never go broke. That's like saying that we'll eventually run out of money for new roads or whatnot. The real bottom line is that it's hinged on our obligation to the system as much as to others, as they are all intersecting and co-dependent. It would be good to have such safety nets, so that the people who will benefit from Social Security in the future would get at least the same level of service for their efforts. Good day!

Brad Post @ Jan Dils

Karoline Peak said...

You never want to find a lawyer based on his commercial or a flyer you received in the mail. Take the time to ask around and get as much input as you can from local family, friends, neighbors, coworkers, before you simply sign on the dotted line. Utilize social media to help you to choose a lawyer based on all those impartial third party reviews.

Karoline Peak @ Ruffi Law Offices, S.C.

Unknown said...

Raising the retirement age sounds really sad. Can you imagine hundreds of 70 year-olds working in factories? They need to rest and enjoy their lives – maybe even their grandchildren. Also, taking money from upcoming retirees who have earned it, and equivocally paid into social security for years is preposterous. Don’t you think they would deserve to get their 6.2% back?