Modeling Social Security 2033 Insolvency

[FindingForward]

In the past SS fixes preserved benefits for lower earners at the expense of higher earners.

I would except the same with any future fixes.

did they change those already on SS at the time? Or change the rules for those who hadn't started yet?

 

[FindingForward]

I agree. The political optics of taking 23% out of someone's $1200/mo benefit are much worse than taking 30% out of someone who paid in the max for 35 years. Never mind that some people who paid the max for 35 years may be every bit as reliant on their SS as someone who paid the minimum for 40 quarters.

Prepare for the term "affluent retiree" to be twisted by the media to become a slur, in preparation for screwing over "affluent" retirees. As in: "The XYZ plan to save Social Security includes cuts to benefits for low income beneficiaries, while the ABC plan preserves benefits for lower earners, while taking more from affluent retirees who don't rely on Social Security. The ABCs say it is unfair to cut benefits for those who most need them, while the XYZs say that a 30% cut to affluent retirees is much larger in dollars, and penalizes those who paid in more to the system."

The political fights over this issue are going to be epic.

I'm so fed up with the penalties paid for being responsible. I never earned big bucks and paid double the SS because I was an independent contractor. But because I scrimped and saved to afford retirement, I get shafted while others who lived much larger during their working years and paid far less into SS get rewarded. Really sucks.

Hindsight's 20-20 and it's all out of my control anyway, but if I could do it over, I'd blow far more money earlier in life, vs saving responsibly, since the former seems to be rewarded much more.

 

[ERD50]

In the past SS fixes preserved benefits for lower earners at the expense of higher earners.

I would except the same with any future fixes.

Yes, but it is still speculation, that's all I'm saying. The current law/regs say an across the board % cut.

No doubt, that may (or even probably?) change, but it is speculation, versus what is on the books today.

[ I'm assuming you meant 'expect', not 'except' ]

 

[ncbill]

Yes, but it is still speculation, that's all I'm saying. The current law/regs say an across the board % cut.

No doubt, that may (or even probably?) change, but it is speculation, versus what is on the books today.

[ I'm assuming you meant 'expect', not 'except' ]

Given past changes, I believe there is an exception to your expectation.

If not, as a lower-earner beneficiary I will find myself loosing my mind.

 

[Koolau]

I've heard SS going away 10 years ago, 20 years ago, as long as I remember in fact. If and when it goes away, we'd have bigger things to worry about than SS ($ losing its status as the world's currency e.g.) So, relax and enjoy life. Better yet, save enough money so that you don't have to rely on SS. Isn't that why most of us are here in this forum?

With "too much" money as well.

 

[Koolau]

Prepare for the term "affluent retiree" to be twisted by the media to become a slur, in preparation for screwing over "affluent" retirees.

My personal "favorite" expression is "fair share." It's never defined but typically interpreted to apply to those who make more than you do.

 

[corn18]

Wonder how much it would help SS if the taxes we pay on SS benefits went into the SS trust fund vs. the general fund? Although the incoming says he wants to end taxes on SS so that won't help much.

 

[audreyh1]

Wonder how much it would help SS if the taxes we pay on SS benefits went into the SS trust fund vs. the general fund? Although the incoming says he wants to end taxes on SS so that won't help much.

The SS taxes do go back to the SS trust fund according to posts above.

 

[Koolau]

The SS taxes do go back to the SS trust fund according to posts above.

That's quite a bit from DW and me - especially if I consider SS being "on top" of my pension and savings withdrawal. (IOW I consider my SS as the "gravy" and what ends up putting me in a higher tax bracket of 24% X 0.85). Probably unfair to look at it that way, but it's still a lot of money BACK to SS even if I just take the average tax rate around 20% (X 0.85).

Looking at it another way: I now pay almost double to SS what I paid back when I was w*rking! Is that "fair?" Don't answer because we don't know the definition of "fair." Decide for yourself.

 

[RunningBum]

7 Things to Know About Social Security and Taxes

Your overall income primarily determines whether you owe taxes on your benefits and how much

www.aarp.org

By law, federal income taxes collected on benefits go into the government’s Social Security and Medicare trust funds, meaning they contribute to future benefit payments.

 

[twirler]

I did some back of the napkin calculations for my Social Security situation assuming the 2033 insolvency results in a 21% hit to my monthly Social Security payments.

I am 64. I do not yet draw SS. I paid the max for 35 years, so I would be one of the people most likely to be screwed when the cliff hits. I have *zero* confidence that the issue will be addressed before 2033, it is too hot of a political football. It will be talked about, debated, anguished over, and nothing will be done.

Apparently when this cliff was established in the 80's by the last SS "reform" (which also screwed me because I was born in 1960, thus my FRA went from 65 to 67), it was baked in that a 21% cut in overall benefits would take place, but that does NOT mean that everyone will take a 21% hit. I honestly believe that if there is any legislation passed concerning this issue prior to 2033, it will be that people under a certain benefit amount will be untouched, and those above that threshold will be hit harder. But, of course, it is all a guess at this point.

So, I did some calculations, assuming that I live to be 85, and that regardless of when I take SS, it will be cut by 21% beginning in 2034. The results are interesting.

My total SS benefit without any cuts, with 65, 67 and 70 as possible ages for first payment, is $827k, $868k, $915k.

My total SS benefit assuming a 21% cut beginning in 2034, with 65, 67 and 70 as possible ages for first payment, is $711k, $734k, $747k. Assuming a 21% cut in 2034 really narrows the difference in overall benefit depending on when the benefit is taken. It really does push me toward taking SS ASAP. Another factor is that, I believe, IMHO, that the lower your benefit is in 2033, the less of a target you will be for cuts. I have seen some prognostications that the cuts will be progressive in nature, similar to the tax code, so the first X amount will be cut by less that the next tier and the next tier. This also pushes me to take SS immediately.

Of course, there may be tax considerations, etc., and every person has a different situation, but has anyone else penciled this out for themselves?

You don’t say that the ponzi scheme that was created to steal the wealth of our future generations of children will become defunct! Who would have thought.

 

[GenXguy]

You don’t say that the ponzi scheme that was created to steal the wealth of our future generations of children will become defunct! Who would have thought.

Social Security is not a Ponzi scheme. Social Security is a legitimate, government-run social insurance program, whereas a Ponzi scheme is a fraudulent, unsustainable investment scam. Social Security’s long-term viability depends on political decisions, economic factors, and demographic trends, not on deception or fraud.

As for that future 25% cut to SS, it's even worse. There's a flaw in how taxes are calculated for Social Security benefits that results in after-tax "net" SS benefits being "cut" every year and have been for years, but most people aren't aware of this.
The SS formula for determining how much of your SS benefits are taxed is NOT indexed to inflation, so that threshold has not increased since it was first introduced in 1983. For a single person, if your income combined with half your SS benefits exceeds $25,000, you have to pay income tax on up to 50% of your SS benefits. If it exceeds $34,000, you have to pay income tax on up to 85% of your SS benefits. $25K in 1983 is worth a lot more than $25K in 2018. Since your retirement distributions and SS benefits will be adjusted with inflation, but NOT the $25,000/$34,000 thresholds, a greater percentage of your SS benefits will become taxable as each year passes (for married filing jointly, the thresholds are $32,000/$44,000.) It's a built-in tax increase, reducing "net" SS benefits, hurting seniors further. The greater your combined income and SS/2, the more you will be affected by this up to a max of 85% of your benefits being taxed! It's absurd, and those thresholds should be increased to reflect inflation since 1983.

The ways it is, you should play it safe by estimating that along with a 25% cut in benefits that 85% of your SS benefits well into the future will be taxable. More information about this can be found in these references:

https://www.marketwatch.com/story/people-who-saved-for-retirement-are-being-punished-by-social-security-taxes-2019-01-07

This 33-Year-Old Social Security Rule Is Wreaking Havoc on Seniors' Retirement Income | The Motley Fool

If lawmakers addressed this issue, millions of seniors would probably see an immediate boost in their annual income.

www.fool.com

Double Whammy: the Taxation of Social Security Benefits

This week, Gail explains how the government takes away a piece of your Social Security benefits.

www.foxnews.com

Research: Income Taxes on Social Security Benefits

Social Security Administration Research, Statistics, and Policy Analysis

www.ssa.gov

I don't expect the taxes on SS benefits will be eliminated completely as some have suggested, but they should be modified to step up with inflation that has occurred since those thresholds were introduced.

I'm not one to support tax increases, but I would be open to paying higher FICA taxes to help shore up SS to prevent cuts to benefits and to prevent increasing the FRA for people within a few years of claiming SS benefit.

At some point, the FRA will need increased for younger workers (perhaps those under 55 today) also as lifetime durations increase over time.

In my spreadsheets, I have SS benefits at 25% less than the promised amount just to play it safe.

 

[rembrandt]

Also, with people having less children, there will be fewer workers paying in to Social Security.

 

[pb4uski]

The "cliff" is what your SS payments will hit in 2032/33.

Reality is that OVERALL BENEFITS PAID will need to drop by 21-23% (depending on who you believe). If congress doesn't change FUNDING of SS by 2032, then benefits will be cut, but many believe that if funding doesn't materialize, there will be a progressive schedule of cuts based on your benefit. That could be, for example, the first $1500/mo is untouched, the next $500/mo is cut by 11%, the next $500/mo by 22%, and everything over $2500 cut by 33%. Just an example. In this example, someone making the (current) max of about $4800/mo would lose $954/mo. A couple with two maxed out earners in that scenario would lose $1908/mo, or $22,896 per year.

The number above are just a made up example, but IMHO it is *very* likely that either the cuts will be progressive as I illustrated, or there will be means testing to achieve the same result. Means testing could be as simple as "what was your MAGI last year", or it could be net worth based.

I highly doubt Congress would cut 21% from the lower 50% percentile of SS benefits. People who are set to receive more than the median are almost certain to be hit harder than those below.

I'd be interested in an citations you have for a "progressive schedule of cuts". I recall doing research on how the cuts would operate a few years ago and found nothing reasonably authoritative other then x% across the board... IOW, if taxes coming in can pay x% of benefits then everyone would get x%.

 

[pb4uski]

I’ve read multiple articles, saying the incoming administration is implementing changes that will cut 3 years from the projected insolvency date.

And what would be the statutory authority for doing that? Or are they relying on presumptive immunty?

 

[pb4uski]

I agree. The political optics of taking 23% out of someone's $1200/mo benefit are much worse than taking 30% out of someone who paid in the max for 35 years. Never mind that some people who paid the max for 35 years may be every bit as reliant on their SS as someone who paid the minimum for 40 quarters.

Prepare for the term "affluent retiree" to be twisted by the media to become a slur, in preparation for screwing over "affluent" retirees. As in: "The XYZ plan to save Social Security includes cuts to benefits for low income beneficiaries, while the ABC plan preserves benefits for lower earners, while taking more from affluent retirees who don't rely on Social Security. The ABCs say it is unfair to cut benefits for those who most need them, while the XYZs say that a 30% cut to affluent retirees is much larger in dollars, and penalizes those who paid in more to the system."

The political fights over this issue are going to be epic.

Yes, but here is the ethical dilemma. Let's say that you have two people who had the exact same earnings for their working years and as a result paid the exact same amounts into SS and have the exact same SS retirement benefit. One of them, Spender, lived paycheck to paycheck and has no retirement savings. The other, Saver, saved diligently for retirement and has well funded retirement savings.

Should Saver get less SS benefits than Spender?

Under current law, they would get the same SS retirement benefit, but the Saver might end up with some of their SS being taxed but the Spender wouldn't so there is already a minor tilt against savers.

 

[jollystomper]

Of course, there may be tax considerations, etc., and every person has a different situation, but has anyone else penciled this out for themselves?

I have looked at our future with a potential SS cut and it will not have big impact on us... I am fortunate to have a pension and investment income so a 21% cut impacts our expected income by less than 8%, and that does not include 401k/tIRA RMDs.

While of course I hope it does not happen, it likely will not impact our planned lifestyle.

 

[SecondCor521]

And what would be the statutory authority for doing that? Or are they relying on presumptive immunty?

I think the item in question is the President elect's promise to eliminate the taxation of SS benefits which is part of current law.

It seems clear to me that there will be a tax overhaul passed by Congress, probably under reconciliation, in 2025, and signed into law. Changing the taxation of SS benefits as part of this overhaul seems plausible to me.

The biggest obstacle would be the slim House majority (hovering around 4 seats now). The only other obstacle would be challenging the law as unconstitutional, which is probably a stretch.

Whether it will happen as I suggest it might, and whether or not these are good ideas is YMMV I guess.

 

[flyoverstate]

I'd be interested in an citations you have for a "progressive schedule of cuts". I recall doing research on how the cuts would operate a few years ago and found nothing reasonably authoritative other then x% across the board... IOW, if taxes coming in can pay x% of benefits then everyone would get x%.

There is no concrete guidance on how the 20-something percent cuts will be accomplished, just that if the trust fund is depleted, what is paid out cannot exceed what is paid in. Currently, depending on what you read, the total aggregate amount paid out would be 21-23% lower than what is paid out today.

If Congress does *nothing* is is *assumed* that the cuts will affect everyone equally. Do you really think that it is going to fly to cut the single grandmother's $1200/mo by the same percentage as the millionaire couple down the road? Even if it is the only thing they do, they will keep the lower earners' benefits intact. Most likely, IMHO, they will come up with a combination of slightly higher payroll taxes, an increase (again) in the FRA, and some kind of means testing to cut higher earners/higher net worth beneficiaries. Just my opinion, but the situation is so dire that they can't just increase FRA and raise taxes, that ship has sailed. Some benefits must be cut.

I also believe that the incoming administration won't touch this issue with a ten foot pole. They wouldn't even touch it with YOUR ten foot pole. They will blather and blame shift, but four years from now, the situation will be even more dire, and the cuts will need to be even more drastic. I am not alone in this opinion, BTW.

 

[marko]

There is no concrete guidance on how the 20-something percent cuts will be accomplished, just that if the trust fund is depleted, what is paid out cannot exceed what is paid in. Currently, depending on what you read, the total aggregate amount paid out would be 21-23% lower than what is paid out today.

Maybe this has been covered somewhere in the previous 69 posts but I'm unclear on the "running out of money" here. We seem to find/print all kinds of money to accommodate any number of causes.

What? Suddenly we need to "follow the law"? Change the law if that's the case. Since when has deficit spending been a concern?

 

[Texas Proud]

There is no concrete guidance on how the 20-something percent cuts will be accomplished, just that if the trust fund is depleted, what is paid out cannot exceed what is paid in. Currently, depending on what you read, the total aggregate amount paid out would be 21-23% lower than what is paid out today.

If Congress does *nothing* is is *assumed* that the cuts will affect everyone equally. Do you really think that it is going to fly to cut the single grandmother's $1200/mo by the same percentage as the millionaire couple down the road? Even if it is the only thing they do, they will keep the lower earners' benefits intact. Most likely, IMHO, they will come up with a combination of slightly higher payroll taxes, an increase (again) in the FRA, and some kind of means testing to cut higher earners/higher net worth beneficiaries. Just my opinion, but the situation is so dire that they can't just increase FRA and raise taxes, that ship has sailed. Some benefits must be cut.

I also believe that the incoming administration won't touch this issue with a ten foot pole. They wouldn't even touch it with YOUR ten foot pole. They will blather and blame shift, but four years from now, the situation will be even more dire, and the cuts will need to be even more drastic. I am not alone in this opinion, BTW.

There is two ways this will go....

Congress does nothing and then (from what I have read) it is an across the board cut... so yes, grandma will have her $1200 check cut... BTW, most on SS are grandmas or grandpas so it is not like a one off...

What you have proposed requires Congress to do 'something'... yes, then can cut the higher payouts more than the lower payout if they choose... but that means they did that... and I bet IF they did something they would do something that would NOT cut anybody's current payments...

 

[flyoverstate]

Maybe this has been covered somewhere in the previous 69 posts but I'm unclear on the "running out of money" here. We seem to find/print all kinds of money to accommodate any number of causes.

What? Suddenly we need to "follow the law"? Change the law if that's the case. Since when has deficit spending been a concern?

Since when has deficit spending been a concern? Well, SS pays out $1.5 TRILLION per year. 23% of that is $345 Billion each year. Without raising taxes and/or cutting benefits, that would be $345 Billion they would have to come up with from the general fund, each year. That simply isn't going to happen. Even if Elon waves his magic wand.

 

[SecondCor521]

Maybe this has been covered somewhere in the previous 69 posts but I'm unclear on the "running out of money" here. We seem to find/print all kinds of money to accommodate any number of causes.

What? Suddenly we need to "follow the law"? Change the law if that's the case. Since when has deficit spending been a concern?

Spending from the Treasury can only be done by law, so yes, every check written by the federal government is authorized by some law. And in fact, a law that originated as a bill in the House.

Deficit spending is only permitted to the extent allowed by another law, albeit one that is regularly modified by Congress and periodically played chicken with via partial government shutdowns.

Changing the law is exactly what is on the table here. Not changing the law (which in practice won't happen), would mean that the US Treasury Secretary would write a check not authorized by Congress, something that has not happened yet in over 200 years. But Congress can't / won't change the law because they can't agree on what the change(s) should be yet. Or they figure it's safer to kick the can down the road a bit further.

 

[flyoverstate]

There is two ways this will go....

Congress does nothing and then (from what I have read) it is an across the board cut... so yes, grandma will have her $1200 check cut... BTW, most on SS are grandmas or grandpas so it is not like a one off...

What you have proposed requires Congress to do 'something'... yes, then can cut the higher payouts more than the lower payout if they choose... but that means they did that... and I bet IF they did something they would do something that would NOT cut anybody's current payments...

They need to come up with $345 Billion additional dollars per year in today's dollars to keep making full payments, probably $400 Billion by 2032. Per year. Just to cover the shortfall. SS's total budget is over $1.5 TRILLION.

That is a lot of "something."

 

[twirler]

Social Security is not a Ponzi scheme. Social Security is a legitimate, government-run social insurance program, whereas a Ponzi scheme is a fraudulent, unsustainable investment scam. Social Security’s long-term viability depends on political decisions, economic factors, and demographic trends, not on deception or fraud.

As for that future 25% cut to SS, it's even worse. There's a flaw in how taxes are calculated for Social Security benefits that results in after-tax "net" SS benefits being "cut" every year and have been for years, but most people aren't aware of this.
The SS formula for determining how much of your SS benefits are taxed is NOT indexed to inflation, so that threshold has not increased since it was first introduced in 1983. For a single person, if your income combined with half your SS benefits exceeds $25,000, you have to pay income tax on up to 50% of your SS benefits. If it exceeds $34,000, you have to pay income tax on up to 85% of your SS benefits. $25K in 1983 is worth a lot more than $25K in 2018. Since your retirement distributions and SS benefits will be adjusted with inflation, but NOT the $25,000/$34,000 thresholds, a greater percentage of your SS benefits will become taxable as each year passes (for married filing jointly, the thresholds are $32,000/$44,000.) It's a built-in tax increase, reducing "net" SS benefits, hurting seniors further. The greater your combined income and SS/2, the more you will be affected by this up to a max of 85% of your benefits being taxed! It's absurd, and those thresholds should be increased to reflect inflation since 1983.

The ways it is, you should play it safe by estimating that along with a 25% cut in benefits that 85% of your SS benefits well into the future will be taxable. More information about this can be found in these references:

https://www.marketwatch.com/story/people-who-saved-for-retirement-are-being-punished-by-social-security-taxes-2019-01-07

This 33-Year-Old Social Security Rule Is Wreaking Havoc on Seniors' Retirement Income | The Motley Fool

If lawmakers addressed this issue, millions of seniors would probably see an immediate boost in their annual income.

www.fool.com

Double Whammy: the Taxation of Social Security Benefits

This week, Gail explains how the government takes away a piece of your Social Security benefits.

www.foxnews.com

Research: Income Taxes on Social Security Benefits

Social Security Administration Research, Statistics, and Policy Analysis

www.ssa.gov

I don't expect the taxes on SS benefits will be eliminated completely as some have suggested, but they should be modified to step up with inflation that has occurred since those thresholds were introduced.

I'm not one to support tax increases, but I would be open to paying higher FICA taxes to help shore up SS to prevent cuts to benefits and to prevent increasing the FRA for people within a few years of claiming SS benefit.

At some point, the FRA will need increased for younger workers (perhaps those under 55 today) also as lifetime durations increase over time.

In my spreadsheets, I have SS benefits at 25% less than the promised amount just to play it safe.

I hear where you are coming from these are things most people in the

Social Security is not a Ponzi scheme. Social Security is a legitimate, government-run social insurance program, whereas a Ponzi scheme is a fraudulent, unsustainable investment scam. Social Security’s long-term viability depends on political decisions, economic factors, and demographic trends, not on deception or fraud.

As for that future 25% cut to SS, it's even worse. There's a flaw in how taxes are calculated for Social Security benefits that results in after-tax "net" SS benefits being "cut" every year and have been for years, but most people aren't aware of this.
The SS formula for determining how much of your SS benefits are taxed is NOT indexed to inflation, so that threshold has not increased since it was first introduced in 1983. For a single person, if your income combined with half your SS benefits exceeds $25,000, you have to pay income tax on up to 50% of your SS benefits. If it exceeds $34,000, you have to pay income tax on up to 85% of your SS benefits. $25K in 1983 is worth a lot more than $25K in 2018. Since your retirement distributions and SS benefits will be adjusted with inflation, but NOT the $25,000/$34,000 thresholds, a greater percentage of your SS benefits will become taxable as each year passes (for married filing jointly, the thresholds are $32,000/$44,000.) It's a built-in tax increase, reducing "net" SS benefits, hurting seniors further. The greater your combined income and SS/2, the more you will be affected by this up to a max of 85% of your benefits being taxed! It's absurd, and those thresholds should be increased to reflect inflation since 1983.

The ways it is, you should play it safe by estimating that along with a 25% cut in benefits that 85% of your SS benefits well into the future will be taxable. More information about this can be found in these references:

https://www.marketwatch.com/story/people-who-saved-for-retirement-are-being-punished-by-social-security-taxes-2019-01-07

This 33-Year-Old Social Security Rule Is Wreaking Havoc on Seniors' Retirement Income | The Motley Fool

If lawmakers addressed this issue, millions of seniors would probably see an immediate boost in their annual income.

www.fool.com

Double Whammy: the Taxation of Social Security Benefits

This week, Gail explains how the government takes away a piece of your Social Security benefits.

www.foxnews.com

Research: Income Taxes on Social Security Benefits

Social Security Administration Research, Statistics, and Policy Analysis

www.ssa.gov

I don't expect the taxes on SS benefits will be eliminated completely as some have suggested, but they should be modified to step up with inflation that has occurred since those thresholds were introduced.

I'm not one to support tax increases, but I would be open to paying higher FICA taxes to help shore up SS to prevent cuts to benefits and to prevent increasing the FRA for people within a few years of claiming SS benefit.

At some point, the FRA will need increased for younger workers (perhaps those under 55 today) also as lifetime durations increase over time.

In my spreadsheets, I have SS benefits at 25% less than the promised amount just to play it safe.

So, what are the economic, political, and demographic trends that need to happen? Well, in my opinion, it’s all about fraud and deception.

The only thing that makes this program ‘legitimate’ is that the government runs it. If anyone else tried this, it would be a Ponzi scheme.

You’re taxing people who aren’t even alive yet, during economic, political, and demographic systems that don’t even exist yet.

Even back testing market data beyond a few years is extremely unrealistic. The idea that the government can see into the future by 100+ years to make a system like this work is just plain silly.

It’s pure communism running amuck. Stealing from the future to benefit in the present. How is it possible to predict economic productivity that could provide this output?

What if a COVID-type situation happens, famine, war… I could go on

To say nothing of a moral perspective. Why isn’t every person with a social security number just provided a TSP program like what is provided to government employees. Boom. Problem solved.

Take a look at the amount you contribute over your life time to social security and what the pay out actually is. I at the very least should get an opt out option. Without the option to opt out it’s theft.