Uncommon Nonsense

Well, I never heard it before, but it sounds uncommon nonsense.”

– The Mock Turtle; Alice In Wonderland

Social Security is a subject that will light a fire under all of my customers, regardless of age, gender, socioeconomic level, or politics. Everyone is disappointed in our Social Security system.

Why?

The answer is simple enough; because the system is forecast to run out of money to pay benefits in a few years.

How Did We Get Here?

On June 6, 1934, FDR announced to Congress that he wanted to create a “social security” program. FDR presented his plan to Congress in January 1935. On August 14, 1935, Congress passed the Social Security Act.

When passed in 1935, Social Security Income would only pay benefits to a retired primary worker beginning at age 65. At the time, the average life expectancy of Americans was age 61. Most people were not expected to live long enough to draw a social security check. Also, there were 37 workers for every 1 retiree aged 65 years or older. Because of this, there were far more people paying into Social Security than there were people drawing out of Social Security. Social Security taxes would be gathered 1935 – 1941, giving the “trust fund” time to build a sizable balance before beginning payments in 1942.

Politicians being politicians, uncommon nonsense took hold and all of this soon changed. In 1939, Congress passed an amendment to the Social Security Act. The amendment added wives, widows, minor children, & parents as beneficiaries, even though none of them had ever paid into Social Security. The amendment also bumped up when payments would begin to 1940. Thus politicians turned the program upside down & inside out before it even began, insuring that the program would eventually implode.

When benefits began being paid in 1940, the program immediately ran into a problem, though no one would know about it for the next 35 years. The 1st person to ever receive a social security check was Ida May Fuller. Ida May paid into Social Security 1937, 1938, & 1939. She received her 1st check in January 1940 for $22.54. Ida May lived to be 100 years old (far beyond 61!). She died in 1975, having drawn $22,888.92 in benefits out of system she only paid into for 3 years. Ida May Fuller was only the first of many Americans to defy average life expectancy and throw the program into insolvency.

Where We’re At

The Greatest Generation are people born before 1924; think World War II era people. There are not many of them left alive and those who are alive are 94 years old or older.

They are followed by the Silent Generation, born 1924 – 1945; think Korean War era people. They are 73 – 93 years old.

Behind them are Baby Boomers, born 1946 – 1964; think Vietnam War & hippies. They are 54 – 72 years old.

Baby Boomers gave birth to Generation X; born 1965 – 1979. They are 39 – 53 years old; think roaring 80’s & Desert Storm.

Young Boomers and older Gen X birthed Millennials; born 1980 – 1996. They are 22 – 38 years old; think young families & ANTIFA.

Behind them is Generation Z; born 1997 or later. Think children, teenagers, & college students.

So, we have 6 living generations. Here’s where the problem comes in. Until recently, Baby Boomers were the largest generation ever … in history. Their children, Generation X is the smallest living generation. As Boomers retire, they stop paying into Social Security and begin drawing out of it. In addition to Boomers, the Silent Generation and Greatest Generation are also drawing out of Social Security. So now we have the smallest living generation trying to support 3 previous generations. That’s 65.7 million middle aged people trying to support 101.7 million retirees! It is impossible.

Millennials are working & kicking in some money to help Social Security, but remember that they are young and have not hit their peak earning years yet. This means that what they contribute to Social Security only helps a little.

That’s only part of the problem. Our politicians, with their uncommon nonsense, have greatly expanded the definition of who is eligible to receive benefits. Again, these are people who have paid little or nothing into the system, exacerbating the problem.

But it gets even better. The average American life expectancy is now 79. This means that someone who retires at age 62 will likely draw out of social security for 17 years.

Compare this to Congress original intent:

  • Only people who paid into Social Security could draw out of Social Security.
  • There were 37 workers paying into Social Security for every 1 retiree drawing out of Social Security.
  • Most people would die before beginning Social Security.

The result of our politicians uncommon nonsense is that in 2018, Social Security began paying out more money than it is taking in.

The Future

So what’s in store for the future of Social Security?

At this time Social Security has enough reserves to continue paying benefits, so no one should see any changes … yet. With more money going out than is coming in, those reserves will eventually dwindle down to nothing.

Dates vary by analyst, but almost all agree that Social Security will run out of money around 2030 – 2040. That’s only 12 – 22 years from now! It also happens to be when Gen X begins retiring en masse, placing even more pressure on an overburdened system.

Basic finance tells us that the Social Security Administration cannot pay out money that it doesn’t have.

So what are we going to do?

Potential Solutions

The public has known about this problem for over 30 years. Our politicians have known about this problem for even longer than that. (Currently, we have a Senator who has been a Senator for 43+ years. We also have 2 Representatives who have been Representatives for 39+ years. Both have known about this problem their entire careers, yet have done nothing about it.)

So we’ve known about this problem for decades. The public keeps electing the same people who helped create the problem and those same politicians keep passing laws to make the problem worse.

All in all, both the public & politicians are to blame for our problem. And for those of you that want to place blame entirely on one party or another … don’t. History proves that both Republicans & Democrats contributed equally to this problem.

The point is, I don’t reasonably expect anyone to propose a solution any time soon. If history is any guide, both the public and elected officials will wait until the last minute to cram through a terrible horrible no good very bad “solution”.

Why? Well, let’s look at what realistic solutions are available & how many people will get angry about any of them.

Solution # 1 – Limit who can draw out of Social Security to only those people who have actually paid in to Social Security. This would dramatically reduce the amount of money being paid out of the system. In fact, this is what the Social Security Act actually states (it was later altered by politicians).

Solution # 2 – Raise the age at which retirees can begin drawing Social Security to 83. The Social Security Act originally intended for only the very aged to receive benefits. Recall that retirees could not begin drawing until age 65, 4 years later than the average life expectancy was 61. 83 is 4 years beyond our current average life expectancy, just like originally intended. Raising the benefit start age to 83 would also dramatically reduce the amount of money being paid out of the system.

Implemented together, the Social Security system would be fixed.

How angry did you get reading those 2 solutions? … Now you know why no politician will ever seriously propose a permanent solution.

So what are politicians considering?

Political Solution # 1 – Means Testing. Politicians want to punish those who have prepared for retirement by sending them a much smaller Social Security check, or even taking it away completely. They will then increase benefits for “the poor”. In political terms, “the poor” are primarily those who chose not to prepare for retirement. Essentially, the people who created the problem & allowed it to worsen over decades, think it’s a good idea to punish hard working, responsible Americans and reward the short-sighted shirkers.

Political Solution # 2 – Eliminate income limits for paying social security taxes. Currently, Americans pay Social Security taxes on their first $128,400 in individual earned income. Individuals earning more than that amount do not pay Social Security taxes on amounts above $128,400. The problem here is that Social Security replaces a smaller percentage of high income earners wages. For example, if you are 65 years old and earned an average of $36,000/year, your Social Security check will be $1,110/month. This means that Social Security will replace 37% of your income. But, if you are 65 years old and earned an average of $360,000/year, your Social Security check will be $2,788/month. This means that Social Security will only replace 9% of your income. Again, politicians think it wise to punish those who had a successful career.

Political Solution # 3 – Begin paying Social Security taxes on unearned income. Currently, Americans do not pay Social Security taxes on interest, dividends, royalties, rent, and other unearned income. The problem here, and history proves this, American business will lower or cease paying interest, dividends, royalties, and other unearned income so that shareholders do not have to pay the tax.

None of these political “solutions” actually fixes the problems with Social Security. There are other political “solutions”, but alas, none of them work either. All that is accomplished is extending Social Security’s life support.

How To Plan

We must plan for all the problems of Social Security and the “solutions” our politicians are discussing. Anyone who fails to do so does it at their own financial peril.

One of the hallmark characteristics of Generation X is a deep-rooted distrust of government. There are many reasons for this, including governments continuous refusal to address the problems of the Social Security system. As a result, Generation X customers rarely ask me to include Social Security in their retirement planning. In fact, almost every Gen X customer I work with has proactively asked me to exclude Social Security from their planning. Taken as a whole, Gen X isn’t expecting to receive much, if any, back from Social Security.

Millennials are young. Some are very young. Most really don’t have firm thoughts about Social Security … yet. Among those that do, they have also asked me to exclude Social Security from their retirement planning. As a side note, most of them shake their heads, openly laugh about the debacle we know as Social Security, and view it as just another money grab by government.

Do you see where I’m going with this? I hope so.

Pre-Retirees should not plan on receiving Social Security benefits. Plan for a long & successful retirement funded 100% out-of-pocket. Doing otherwise could easily spell financial disaster for you in your old age.

What about the Greatest Generation & the Silent Generation? I don’t mean to be morbid, be we do need to be realists. These folks are so aged that there is little possibility they will live long enough to see “solutions” implemented in the Social Security system. Just enjoy your life and don’t worry about Social Security.

We now know how the young, middle aged, and very old should plan. What about those who are in between; Baby Boomers?

A small percentage of my Boomer customers, maybe 25%, have so well prepared themselves for retirement that they would experience no change in their standard of living if they lost Social Security benefits. They don’t need to do anything except continue doing what they’ve been doing.

Around 50% of my Baby Boomer customers depend on Social Security to some degree. They could lose benefits & retirement would continue, just not as comfortably as it has been. These folks need to begin weening themselves off of Social Security. Doing so will lessen the shock when a “solution” is eventually implemented. Work on lowering your budget & growing your assets. Develop a budget of Needs; those things you must have to live and a budget of Wants; things we’d like to have but can live without. By cutting out a few Wants, most of these people can get themselves in shape fairly quickly. Now grow your assets. Your entire life you’ve been taught to become financially conservative when you retire. Nonsense!!!!! Retirement is not the end of life. It is just the beginning of another very long phase of life. Your assets must continue to grow & outpace inflation over a very long period of time. Work with your advisor/planner to position your assets for reasonable growth over the next 20 years.

Unfortunately, around 25% of my Boomer customers are reliant on Social Security income to make ends meet. Smaller Social Security checks would be a temporary disaster. Some would make it and some would not. A loss of Social Security would be a complete and permanent disaster for all of them. These folks know who they are. They need to create Needs & Wants budgets too, but they have to go farther than just cutting back a few Wants. They must cut back “Needs”. Most have a mortgage. Many have vehicle payments. Almost none have cash savings. You need to downsize your home so that you do not have a mortgage. You need to scale back your vehicles so you don’t have payments. You need to make a complete lifestyle makeover until you can afford to live without Social Security.

Upside down and inside out doesn’t even begin to describe the mess we are in with Social Security. And as I said earlier, for at least 30 years we’ve known this day would come. And we did absolutely nothing about it. It’s time to stop procrastinating and start preparing ourselves for the disaster that is Social Security.

 

Sapiat Asset Management is an independent registered investment advisor, specializing in financial planning based, asset management for Gen X Individuals & Families and their Trusts & Businesses.

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