“The Insecurity Around Social Security”

Fires, viruses, civil unrest; will 2020 ever end?  With only two months left in the year coronavirus has officially claimed another victim: Social Security.  Due to the economic impact of Covid-19, the Social Security system is now projected to run out of money in 2031, four years earlier than originally thought. We knew this day was coming, we just didn’t know it would be so soon. The impact of coronavirus has accelerated Social Security’s decline due to the way the system makes money. Social Security makes the bulk of its money three ways:

1. Payroll taxes
2. Taxes on actual Social Security benefits
3. Interest earned on money in the Social Security Trust Fund.

Unfortunately, the pandemic, which brought business throughout the country to a standstill, has jeopardized all three revenue sources.  During the first two months of the pandemic alone, the U.S. lost over 21 million jobs and the nations deficit hit an eye-popping $3.3 trillion.

What does this mean for future retirees?  According to the Congressional Budget Office, if nothing happens between now and 2031, future benefits could get cut by an estimated 25%.

How Did we Get Here?

Retirement is a relatively new invention. Like a currywurst, Bavarian beer, and the Mercedes S Class—the modern idea of retirement can be seen as a German invention. In the 1880s, as Americans were tasting Coca Cola for the first time, German Chancellor Otto von Bismarck had a problem. And that problem was Socialism.  Bismarck was losing power to Socialism daily and he had a decision to make. He needed a way to appeal to citizens and he did so by instituting a Social Security System.  Instituting a Social Security system was a way to show working-class German’s that he had their best interests at heart. Additionally, by using the retirement age of 70, and considering life expectancy during that time, it meant Bismarck would pay almost nothing to do this.

But then a funny thing happened…The system became wildly popular. So much so that more than 55 years later the United States started a Social Security program of their own.  Under President Franklin D. Roosevelt the Social Security Act was signed into law in 1935 and a retirement age of 65 was chosen.  Interestingly, the average life expectancy at this time was still only 61 Years old!

Fast forward almost 90 years, and with advances in medicine the average life expectancy is 83 years.  So, for a system that originally offered benefits to very few people is now expected to assist nearly everyone during retirement.

Understanding your Options

The good news is that this potential reduction in benefits is not expected to hurt current Social Security recipients. The bad news is that the bulk of this reduction will affect the youngest workers in the country today.  While certainly not fun to hear for the younger generations, it is a positive for a couple of reasons:

1. Current and soon-to-be retirees will not need to worry about a change they didn’t have time to plan for
2. Today’s youngest workers will have time to plan around this potential catastrophe

While we hope that congress will come to a resolution that will save the system, the best thing we can do in the meantime is plan for the worst. Most people can do this in two ways:

1. Know Your Benefits

The average Social Security benefit is $1,514/month.

The current highest benefit at Full Retirement age is $3,011/month.

The current highest benefit at age 70 is $3,719/month.

Social Security only replaces on average 40% of your pre-retirement income.

2. Know How Much you Need to Save

If you’re a family making $100,00 ($50,000 for each spouse) a year Social Security will pay you a maximum of $1,624/month per spouse. That’s $38,976 per year—very close to our 40% average.

If benefits are cut by 25% then each spouses monthly benefit will get cut by $406. That’s $9,744 a year in lost income if Congress doesn’t make other legislative changes. To fix this you will need to begin setting money aside in anticipation of this shortfall. The family in this example would need to save an extra $150/month earning 7% interest for 35 years.  The idea is that this would produce a nest egg heading into retirement that makes up for the Social Security shortfall.  As always, the more you can save now, the better!

What Now?

Hopefully, we will never have to worry about this. There are many things congress could do to shore up Social Security for the long haul such as extending age eligibility, increasing SS tax rates, or increasing the maximum annual income that can be taxed by social security (currently $137,700).  For many of our younger clients, we encourage them to plan for retirement assuming there will be no social security program when they retire.  While the likelihood of that occurring is small, it ensures they take control of their retirement dreams while not relying on factors outside of their control.