Our goal is to help you avoid making costly mistakes when it comes to making Social Security and financial planning decisions.
We are going to answer lots of questions involving Social Security over the next few pages. Although we can have accurate information about the past, using that information to predict the future comes with a number of challenges and uncertainties. By looking at the past to get estimates for the future, we know that history doesn’t repeat itself exactly but could give us some guidance to make financial planning adjustments. Like Mark Twain once said, “History never repeats itself, but it does rhyme.”
What is the Purpose of Social Security?
Social Security was signed into law in 1935 by Franklin D. Roosevelt. The program started as a retirement program that would only pay retirement benefits to the primary worker meaning that spouses and children would not receive benefits on behalf of someone. That was changed in 1939 to provide survivor benefits and benefits for the retiree’s spouse and children. After several more years, disability benefits were added in 1956.
How Is Social Security Funded?
Social Security is funded through FICA (Federal Insurance Contributions Act) taxes. If you have paid much attention to a pay stub, you will have seen the FICA letters on it. These are tax dollars that you have paid into the system for you to collect on at a later date.
At What Age Can I Start Taking Social Security?
For the retiree, the earliest you can begin Social Security, unless you are on Social Security Disability, is age 62. This is referred to as early retirement. Your FRA (Full Retirement Age) will depend on which year you were born. Others in your family may receive Social Security benefits on your behalf without having to necessarily be at the age of 62.
What Does It Mean For Social Security to Go Broke?
For Social Security, the phrase “Go Broke” refers to the time at which Social Security will not have any excess reserves in the Social Security Trust Fund because of excess withdrawals. In 2010, taxes and income collected did not cover the total amount of benefits paid out for that year which has led to a decline in the trust fund balance for Social Security. This can be attributed to several factors:
- Life expectancy is much longer than when Social Security began. In 1935, the average life expectancy was 60 years old compared to 76 years old today.
- The birth rate is lower which points to a reduction of workers in the workforce. In 1965, there were 4 workers to 1 retiree; as of 2020, there were 2.7 workers to 1 retiree, and it is projected this will continue to drop to 2.2 workers to 1 retiree by the year 2039.
- The numbers of Social Security Disability claimants continue to rise as well, which puts a further strain onto the Social Security Trust Fund.
According to the 2021 Trustees Report, the “redemption of trust fund assets will be sufficient to allow for full payment of scheduled benefits until 2034.” When Social Security “goes broke,” the trust fund is designed to not pay out more benefits than it takes in. In other words, that would amount to a 25% Social Security payment reduction across the board which would put an intense strain on many households in America. For a married couple receiving $40,000/year in Social Security benefits, their benefits would be reduced to $30,000/year. Talk about a painful adjustment!
What Will Be Done About It?
There are a couple options that our Federal Government could consider. One option would be to simply do nothing and allow benefits to be reduced when the Social Security Trust Fund runs out of money. That is not a good option for families or for those officials hoping to get reelected near that time. Another option that has been mentioned is to begin reducing Social Security benefit payments for higher income individuals. This would essentially be another form of increased taxes for higher income individuals. One of the ideas discussed around reducing benefit payments for higher income individuals would involve means-based testing.
Under means-based testing, the government determines whether an individual or family should receive assistance based on their personal resources available to them. This is not a new concept! Means-based testing was used in 2020 when COVID-19 stimulus payments were mailed out. For many higher income households, COVID-19 stimulus payments were not received because their income exceeded threshold limits set by the Federal Government.
A current idea would involve reducing governmental benefit payments (i.e. Social Security benefit payments) for households with gross annual income of $80,000 and above. Although you could argue that $80,000 should not qualify as having a higher income, that will not do any good at this time since the funding issues with Social Security are beyond your control. What you CAN do is begin planning for this event and prepare yourself and your family.
Will This Affect Me?
If you receive $40,000 yearly from Social Security currently, based on historical inflation adjustments, you should receive about $49,000 in 2034. If you are receiving $25,000 from IRA withdrawals or a pension currently, you will need approximately $31,000 in 2034 for the same buying power. In other words, if your taxable income currently is $65,000, you could very well reach the $80,000 limit set for means-based testing.
What Can I Do About It?
If you are going to be affected, you have three options:
- Do nothing.
- Think about it and procrastinate. This accomplishes the same as doing nothing.
- Start planning.
We’ve run numerous different situations involving conversions to Roth IRAs, delaying Social Security and other investment strategies to assist with the eventuality of Social Security going broke. If you would like to know your Social Security Risk Score, click here.
Our Approach
- An enlightened philosophy around all things financial.
- A planning strategy that remains fluid and dynamic.
- Our proprietary process, the 3:10 FORMula, guides you to and through retirement.
We understand and care about the things that matter most to you. We know that your family, occupation, and recreational activities are WHY you do what you do. We also understand that money isn't the most important thing to you, but instead, HOW you can take care of the things that mean the most to you. By knowing what matters to you, and understanding what we can control, our process can guide you every step of the way. We put a lot of emphasis on controlling the things that are within our control. We focus on controlling are our Investment Philosophy, our Planning Strategy, and our Process.