Promising Editorial On SS "Are Benefits Safe" from AARP Bulletin 11-2018

[joeea]

To me that's an easy one, we all choose where to live. It's not the role of government to factor in individual cost of living IMO. If you live in NYC, you know what you're in for financially and folks in Alabama shouldn't subsidize your choice.

Seems to me we've already had the "which states actually subsidize which states?" discussion here before.

Hint: High-tax states send far more tax dollars to Washington than residents in low-tax states. And the low-tax states get far more back than they send.

This might help: https://www.theatlantic.com/busines...tates-are-givers-and-which-are-takers/361668/

 

[joeea]

Have we as a country decided that SS has changed from pay as you go to pre-funded?

No. Not yet.

Was the trust fund a one time fix for the baby boom or do we think we should now always have a trust fund?

Unless the laws are changed, there will always be a trust fund.

The fund may become depleted. It may grow again. That depends solely on the incoming funds that Social Security receives.

 

[joeea]

This is just wrong. By 2033 SS will have to cut benefits by 25% or it will go bankrupt.

Sorry, you are confused. That's simply not how it works.

Unless everyone in the US stops working, the Social Security system cannot go bankrupt.

The system is paying out more than it takes in now. But that will be buffered by the money from the Social Security Trust Fund which allows current benefit payments to continue unchanged until around 2032-2034 or so. At that time, the Trust Fund will have been depelted and Social Security can only pay out whatever monies it takes in each year.

At no point will it "go bankrupt".

 

[Popeye]

You are totally wrong Popeye. You need a massive trust fund... in fact, bigger than the one that we have... to pay for the promised benefits. So what that means is that we have been undertaxed for 30 years, not overtaxed.... if we had been overtaxed as you think then there would be plenty of money to pay for benefits and we would not be facing a 23% haircut in 2034.

Think of it this way... how much money would you need in the bank today to provide for your promised SS benefits? Then multiply that result by 76.4 million baby boomers... its a big number.
.

Ok, then it is not a pay as you go system. That was my original thought.

A massive trust fund is one way to go and probably most palatable. We could really just hike the SS tax rates a couple percent and go back to pay as you go from here on out.

 

[joeea]

We could really just hike the SS tax rates a couple percent and go back to pay as you go from here on out.

Only if you are willing to accept a benefit that varies (both down and up) every year. That is the nature of pure pay as you go systems.

I doubt most folks would like that.

 

[Popeye]

Only if you are willing to accept a benefit that varies (both down and up) every year. That is the nature of pure pay as you go systems.

I doubt most folks would like that.

No, you just use a small trust fund to buffer the year to year variations like we all do with our savings when big ticket expenses arise. It sounds like that was the original design of the system.

 

[joeea]

No, you just use a small trust fund to buffer the year to year variations like we all do with our savings when big ticket expenses arise. It sounds like that was the original design of the system.

That is the current design. Nothing to "go back to".
It's not a pure pay as you go system.

 

[bobandsherry]

The lower unemployment rate, at a level not seen in decades, means a lot more people now working and therefore paying in than prior year estimates. Will be interesting to see how the estimate the # of payers into the program going forward.

 

[Ian S]

Check this out: The Social Security Game | American Academy of Actuaries | American Academy of Actuaries

It would be "easy" to solve by doing two simple things... elimimate the cap but increase benefits (71%) and apply payroll tax to earnings used to pay health insurance premiums (32%).... no real need to increase the tax rate or raise the FRA or tax more benefits.

Interesting idea. I'd be in favor of eliminating the cap on wages in a gradual manner probably and in a few years see where we are and make further adjustments if necessary. We have 16 years, perhaps more if the economy does better than expected so we don't have to panic. Indeed, a large part of the problem was the hit the trust fund took during the great recession 10 years ago: folks who aren't working don't pay into social security. Consequently, the trust fund depletion date has dropped from the 2040's to where it is today (2034.) The economy has of course improved since the economy almost collapsed and indeed, this is reflected in the fact that the year the trust fund is projected to run out stayed the same from last year to this. That's a good sign.

 

[bada bing]

The lower unemployment rate, at a level not seen in decades, means a lot more people now working and therefore paying in than prior year estimates. Will be interesting to see how the estimate the # of payers into the program going forward.

The problem with that idea is that people working isn't uniformly beneficial to the funding status. Short career and low wage people qualify to draw out much more than they pay in. That is also the fallacy of the idea that low wage immigrants will be a boon to the system. The problem is the ratio of people who qualify for more than they paid in relative to those who pay more than they will receive. Stagnant and low wages kill the system. Short careers kill the system. The system is vulnerable to crash by design by virtue of depending on the ratio of upper earner to lower earners remain in bounds.

So no, it isn't beneficial to have blips of low wage employment growth. It kicks the can down the road by paying into the system but it eventually creates a bigger problem by qualifying a bigger ratio of below 1st and below 2nd bend folks.

There are lots of threads here about income inequality. And lots about ageism and forced early retirement. Even some about immigration. Those are all things that have profound effects on SS, and the trends have been bad for SS. Even the idea of early retirement is bad for SS, the foundation of this forum is a negative force for SS. Perhaps there should be a SS penalty for voluntary early retirement ? Perhaps instead of zeros entered in the earning record for less than 35 years of work, there should be a deduction for each no-earning year ?

 

[bobandsherry]

The problem with that idea is that people working isn't uniformly beneficial to the funding status. Short career and low wage people qualify to draw out much more than they pay in. That is also the fallacy of the idea that low wage immigrants will be a boon to the system. The problem is the ratio of people who qualify for more than they paid in relative to those who pay more than they will receive. Stagnant and low wages kill the system. Short careers kill the system. The system is vulnerable to crash by design by virtue of depending on the ratio of upper earner to lower earners remain in bounds.

So no, it isn't beneficial to have blips of low wage employment growth. It kicks the can down the road by paying into the system but it eventually creates a bigger problem by qualifying a bigger ratio of below 1st and below 2nd bend folks.

I guess if you know that the low employment rate only is beneficial to the groups you've noted. However wages are also on the rise, real wages, so it seems to point to different sector of workers. But who knows...

 

[camfused]

I have seen several references to raising the FRA age, but I am not sure I have seen a mention of raising the early age capability from 62 to maybe 64. If most people are taking it at 62, then raising the minimum age to 64 (and maybe the FRA a couple years too) should have an impact on the funds.

 

[Popeye]

That is the current design. Nothing to "go back to".
It's not a pure pay as you go system.

No, what we currently have is a massive, multi-trillion dollar trust fund to buffer a generational variation over a couple of decades. I don’t think that was the design prior to the 1986 fix.

I’m thinking of a SS tax rate that gets us close to say 105% of required yearly layouts. Then save the overage for the lean times. Review and adjust the tax rate going forward every 5-10 years if needed. Of course, that would require us addressing the issue in a sensible manner every few years. I admit that would not be very likely in DC.

 

[deserat]

“A means test would be far more intrusive and expensive to administer than Social Security is today. Applicants for benefits would have to undergo investigations of their income and asset holdings, possibly including the income and assets of others in their households. Investigations would have to be updated frequently as income and wealth change, and benefit levels would have to be adjusted accordingly.”

Have any of you done a FAFSA form? WOW – I took one look and said ‘no-thank-you.’ Talk about a financial rectal examination of everyone in your household…..so, I think they’ve got a mechanism in place they could replicate if they wanted to.

“Those of us younger baby boomers already took a hit with the last "fix" when they raised the FRA from 65 to 67. Personally, I don't want to take another pay cut once I finally start SS.”

Hear, hear – I’m one of those “tweeners” constantly adjusting to all of the ‘new’ policies, rules and ideas…getting tired of being the ‘stuckee.’ Frankly, I did most of my lifestyle costs planning and financial planning not necessarily including SS….it will be gravy to me although I pay 15.3% of every dollar I earn into it (being self-employed). So the burden has been much higher for me in the last decade or so. That’s a pretty damn big chunk-o-change of any check as far as I’m concerned. Nevertheless, it still grates to think I might have just thrown that money into the trash can to be burned…..we’ll see. I have more than a decade to the FRA---lots of time for the politicians to ignore the problem or dork it up. My trust in politicians to solve this problem goes down more and more each year.

 

[Independent]

They already have made SS a quasi-welfare program: if you maxed out SS wages every year of your life, the amount of your SS benefit that you eventually receive will be substantially less %-wise than someone who made 30% of the max SS wages.

If "already" means from the very first benefit formula, that is correct. The SS benefit formula has always had a mix of "individual equity" and "social adequacy".

For instance - did you know that when SS first started, they only taxed the worker just 1% of wages (the employer didn't contribute anything!).

This is the text of the 1935 act:

SECTION 901. On and after January 1, 1936, every employer (as defined in section 907) shall pay for each calendar year an excise tax, with respect to having individuals in his employ, equal to the following percentages of the total wages (as defined in section 907) payable by him (regardless of the time of payment) with respect to employment (as defined in section 907) during such calendar year:
(1) With respect to employment during the calendar year 1936 the rate shall be 1 per centum;
(2) With respect to employment during the calendar year 1937 the rate shall be 2 per centum;
(3) With respect to employment after December 31, 1937, the rate shall be 3 per centum.

https://www.ssa.gov/history/35actix.html

SECTION 801. In addition to other taxes, there shall be levied, collected, and paid upon the income of every individual a tax equal to the following percentages of the wages (as defined in section 811) received by him after December 31, 1936, with respect to employment (as defined in section 811) after such date:
(1) With respect to employment during the calendar years 1937, 1938, and 1939, the rate shall be 1 per centum.
(2) With respect to employment during the calendar years 1940, 1941, and 1942, the rate shall 1 1/2 per centum.
(3) With respect to employment during the calendar years 1943, 1944, and 1945, the rate shall be 2 per centum.
(4) With respect to employment during the calendar years 1946, 1947, and 1948, the rate shall be 2 1/2 per centum.
(5) With respect to employment after December 31, 1948, the rate shall be 3 per centum.

https://www.ssa.gov/history/35acviii.html#Income

The 1939 Act adjusted the early dates and made the employer and employee tax rates equal. See sections 601 and 601 here https://www.ssa.gov/history/pdf/1939Act.pdf

 

[Independent]

“ Nevertheless, it still grates to think I might have just thrown that money into the trash can to be burned…..we’ll see.

No, the money was not thrown in the trash and burned. It was used to pay benefits to people who were retired while you were working. Those people may have included your parents and grandparents.

Your benefit for those taxes is the the older generation was not begging in the streets, or living in your home, or getting checks directly from you. Or (if you are unusually lucky) your benefit is that you'll inherit more than you would have if those older people hadn't gotten their SS benefits.

 

[Independent]

I "normally" am against passing the buck down to the next generation - we've been doing just that for, well... for generations. But, on the other hand, I don't think people that have spent their life planning on a certain SS amount, on a certain date, should have it changed after the fact. There are many, many people that rely on SS for a very large % of their retirement income. I think people that spent 35 years paying into the plan should get what they expect.

I'm not sure if you are talking about people who are currently 85 or currently 55.

Regarding "what they expect", my 2001 Social Security Statement says:

By 2037, the trust funds will be exhausted and the payroll taxes collected will be enough to pay only about 72 percent of benefits owed.

So I think anyone who was still working in 2001 should expect to have a significant benefit cut somewhere in the future. The years and percentages changed from one statement to the next, but the general idea of an expected benefit cut was pushed pretty clearly.

 

[youbet]

I think the problem with means testing is that it's hard to do. That's why whether to tax SS is based upon income not means.

Sure, they'll do it by income, as they are already doing for Medicare. The system is already fully in place and has been operating for years for Medicare. Including SS will be no problem.

If you mean income as 'means' I think there's a bunch of threads here about how folks easily adjust their income for ACA reasons.

No system is perfect, that's for sure. But the gov't seems to have a system in place and working for Medicare OK. And, sure, people do "adjust" income to avoid Medicare IRMAA. But, just the same, millions of folks are identified as so-called "high earners" and pay more, much more, for their Medicare.

If you mean net worth, there are similar threads here about mechanisms (trusts, gifts etc) that address that and I suspect its easier to do than income. I know of a few folks who live extremely well but have no real net worth of their own.

I'm assuming they'll do it based on income, just as they already do for Medicare. Everything is already in place and operating smoothly. Just reduce the SS of folks who pay IRMAA using the same systems already in place. Cheap and quick.

As far as the fairness of it all, I'm reminded of our Mass income tax forms that allow you to check a box and pay the original higher tax. It was put in place as some folks were outraged at the 'unfairness' of a tax cut. Last time I looked, only about 1000 people per year are still outraged enough to check that box and pay the higher tax.

Fair or not fair, and to whom, will be debated eternally just like all progressive taxes and benefits...... I think it's really a matter of keeping the SS system going. Certainly the burden should not fall onto the shoulders of working class families through higher FICA taxes. Retirees who consider SS "gravy" as frequently mentioned here on the FIRE Forum can kick in modestly via reduced, means tested SS.

Marko, from the tone of some of your posts, I'd assume you'd never notice the difference if your SS took a little hit so that lower income working youngsters didn't have their FICA raised as much. So, why make a big deal of it?

 

[youbet]

Unless the laws are changed, there will always be a trust fund.

The fund may become depleted. It may grow again. That depends solely on the incoming funds that Social Security receives.

Actually, "the fund" suffers from the same kind of issues that several of the Illinois pension funds suffer from:

1. Inadequately funded given the projected outputs.

2. Existing outputs generously increased by legislators who eyed the trust fund not as a buffer against population and income variations over time but as a source of funds to be doled out to special interests. SS has become not just a retirement fund but also very much a welfare fund for minor children, orphans, the disabled, etc. I'm not saying that helping these folks isn't the right thing to do. In fact, I'd be all for helping most of them even more. But taking the money from the SS retirement trust fund was not the right place and is a big part of the current problem. Separate taxes and funds should have been set up by our beloved political leaders for these purposes.

 

[youbet]

I have a real problem with means testing. This makes SS more of a welfare program, than an earned benefit.

It's already a welfare program by any definition of welfare. And the way income taxes are applied to SS earnings, it's already partially means tested.

I'd have been fine with opting out of SS and being allowed to invest the same amount in a tax-deferred account, but that wasn't an option.

I used to say that too, and vigorously. But now that I've been collecting for 10+ years and enjoyed the security of a modest monthly payment supplementing my investment income, I'm glad I have it. You may change your tune too.

If you do continue to feel you want to opt out, do as I did and start SS at 62 and invest the income. It worked out well for me with the nut I accumulated throwing off, at a prudent WR, more than enough to offset the lower age 62 SS amount.

 

[joeea]

The lower unemployment rate, at a level not seen in decades, means a lot more people now working and therefore paying in than prior year estimates.

Every little bit helps. But it's not enough to move the needle on SS input.

 

[joeea]

That is also the fallacy of the idea that low wage immigrants will be a boon to the system.

It's not a fallacy at all. Immigrants in general are indeed a boon. Not all immigrants are "low wage".

Short careers kill the system.

FIRE = system killers!?

There are lots of threads here about income inequality. And lots about ageism and forced early retirement. Even some about immigration. Those are all things that have profound effects on SS, and the trends have been bad for SS.

You are conflating a lot of "trends" and incorrectly lumping them all as "bad for SS".

Even the idea of early retirement is bad for SS, the foundation of this forum is a negative force for SS.

Yup.

Perhaps there should be a SS penalty for voluntary early retirement ? Perhaps instead of zeros entered in the earning record for less than 35 years of work, there should be a deduction for each no-earning year ?

That will never happen.

On the other hand, perhaps the basis for SS benefits should be more than 35 years?

 

[joeea]

No, what we currently have is a massive, multi-trillion dollar trust fund to buffer a generational variation over a couple of decades. I don’t think that was the design prior to the 1986 fix.

The Social Security Trust Fund was created in 1939. Just a few years before the 1986 fix.

I’m thinking of a SS tax rate that gets us close to say 105% of required yearly layouts. Then save the overage for the lean times. Review and adjust the tax rate going forward every 5-10 years if needed. Of course, that would require us addressing the issue in a sensible manner every few years. I admit that would not be very likely in DC.

It's very reasonable to require that Social Security tax rates be formulaic and adjusted at a set number of years.

Lawmakers would likely have a hard time agreeing to such a formula, however. Clearly some would like to scale back SS and other entitlements and others would like to expand them. Sadly, there's little bipartisan agreement on a "correct" formula.

Maybe things will change down the road. But for now, it's hard to envision Congress not just kicking the can down the road until 2030 or so.

 

[donheff]

What Youbet said. Congress is not likely to start requiring us to fill out a FAFSA form. Income is used for means testing today and will be easy to use in the future. I understand why people who are just getting by on SS would worry about a 23% haircut. But those of us who don't even need to figure it into our calculations can well afford to take a modest hit. And those of us who knocked down work incomes way over the average can afford to toss a little more into the pot so people scrapping by can eke out a marginal existence in old age. SS does not a socialist dream state make but it just may help keep us lucky few from moving into gated communities.

 

[ShokWaveRider]

Here is another promising article. I like to think of myself as a "Glass Half Full" person (for the most part, HI not withstanding). I for one again feel encouraged. Sorry no summary points on this one you will have to read it, if you are interested. They do talk about a possible 21% Cut though.

https://www.usatoday.com/story/money/2018/11/09/when-does-social-security-run-out/38452267/