And keep your retirement; And your so-called Social Security
– Merle Haggard (Big City)
I am a huge Merle Haggard fan, but I must admit this may be the worse financial advice ever mentioned in a song. Social Security is the bedrock on which our retirement income is built. How important is Social Security? A married couple where only one spouse works and earns $100,000, will get about $43,000 per year at full retirement age.* Assuming retirement spending of 80% of current income, you can see that Social Security provides significant retirement income.
Not only will you receive that monthly check, but that check increases with inflation. There are not many options out there that will keep up with inflation. The final kicker is that this is backed by the US Government. While you can say what you want about the government, push comes to shove, who do you trust more to have the ability to pay on a guarantee?
Any discussion about Social Security runs the risk of quickly getting out of hand. There is so much to cover, you could write a book on the subject. In fact, many have. What may be surprising is that there is enough to know about Social Security to fill a book. Hopefully, without going into too much detail, I will make one more point.
The longer you wait to start collecting, the bigger your monthly check becomes. Many people who could & should wait do not. One of the biggest reasons? Fear. I say that because many people I talk to are worried about Social Security going “bankrupt,” and then they will get “nothing.” It is essential to understand how Social Security is funded to lessen this fear. Social Security is a “pay-as-you-go” system. The money collected today is paid out to retirees today. When you start collecting, whoever is working at that time will be funding your check. This is important since this means Social Security cannot go “bankrupt.”
When you hear about the funding issues, what they are talking about is the Trust Fund. There were times when Social Security brought in more money then it paid out. Remember, the Social Security tax you pay can only be used for Social Security benefits. When there is excess, it goes into the Trust Fund, to be tapped when the system needs to pay out more than it brings in. For several years now, the trust has been paying out. Based on current projections, the Trust Fund is expected to be empty sometime after 2030. Projections estimate at that time, the tax received will cover about 75%-80% of payouts. This creates a worst-case scenario in which a recipient’s benefit could be cut by 20%-25%.** In the case of the earlier couple, the $43,000 could go down to $32,000 – but it doesn’t go to $0!
Now it is true that Congress could reduce retirees and near-retirees benefits by changing the laws governing the program. However, two points may allow some confidence in that not happening. As we speak, the full retirement age for Social Security is increasing from 65 to 67 because of a law passed in 1983, over 35 years ago. This, along with other federal changes to retirement plans, demonstrates that Congress does not like to make changes without plenty of time for people to adjust. The second (and cynical) point is the fact that politicians like getting re-elected. Politicians have a hard time getting re-elected when they make their voting constituents mad, and older Americans tend to be the most reliable voters. The quickest way to make the older American mad? Monkey around with Social Security.
Many people view financial planners as only for the wealthy who have the resources and/or unique situations that need some obscure solution. This couldn’t be further from the truth. We are primarily illuminators and educators. Our purpose is to help people figure out where they are relative to their goals and what tools are available to secure those goals.
*Calculation from SSA.gov quick calculator
** SSA Trustee 2018 report. https://www.ssa.gov/oact/tr/2018/II_D_project.html#105057
Investment Advice offered through Private Advisor Group, LLC, a Registered Investment Advisor.