The third rail of American politics, Social Security is the program no politician will touch for fear of voter backlash and defeat next time they are up for reelection. The greatest entitlement program America has ever seen continues to chug alone blind to the fact that the viable system that was put in place in the 1930’s can no longer sustain itself in the 21st century. The program will continue, but consider America’s social changes over the last 70 years and you will quickly realize the challenges the system faces today.
President Bush made Social Security reform a pillar of his first term and was making moderate progress with a program that would have allowed workers to own 3% of their withholdings allowing them to manage the funds and invest them as the worker saw fit. Unfortunately, September 11th happened transforming his presidency which moved Social Security reform to the back burner. Now eight years later the system is as strained as ever leaving those receiving benefits worried about the value of their benefits and those workers contributing into the plan worried if they will ever see any benefits.
Remember, this is a system that was built on the premise that there would be an ever expanding, or at least level workforce, and the actual life expectancy would maintain or grow at a very minimal rate. Neither happened! The program’s foundation is based on future workers paying current benefits to retirees. That worked in the 30’s, 40’s and even 50’s, but not today. During the 1950’s America had 17 workers to 1 retiree, in the 60’s that ratio changed to 5.1 to 1. In 2005 the workforce reduction went to 3.3 workers paying benefits for each retiree. Under current projections, in 2031 every two workers tax will go to pay one retirees benefits.
It’s worse if you look at longevity. During the 1930’s when the program was constructed retirement age was 65. Not bad, you worked until age 65, retired and received a government retirement. But what you didn’t know was a male’s life expectancy in the 1930’s (I use men because almost 100% of the work force was comprised of men) was 67. A large percentage of workers never made it to 65 and if they did an even greater percentage only received benefits for two years. The life expectancy of a man who is 65 today is 84 and a woman who is 65? Her life expectancy is 88. Do the math. In the 1930’s most retirees lived on average two years past normal retirement age, today their life expectancy is over 20 years.
So what to do with this program? Left to our politicians in Washington, not much will change. This program generates billions of revenues into the federal coffers and the program is a backstop on federal overspending, meaning it’s where the government gets money when they run low. They just take the funds and replace them with IOU’s. Today we have a shrinking workforce, and a growing retiree population, just the opposite of the 30’s, 40’s and 50’s. Remember, this is a government program, so outwardly reducing benefits and increasing payroll taxes, especially to one of the largest voting blocks in the country, seems unlikely.
Here are the three adjustments the government has made to relieve the financial pressure on the program:
First, normal retirement age has been adjusted – If you were born in the year 1937 or before your normal retirement age is still 65. If you were born in 1943 to 1954 your new normal retirement age is now 66. And if your birth year is 1960 and beyond, your normal retirement age is now 67. For those of us between 1938 and 1942 and 1955 and 1959 our normal retirement age is index to your age and month. An example, I was born in 1958 so my normal retirement age is 66 and 8 months.
Second, your social security income will be taxed. If you are an individual in retirement and your earned income is over $25,000, your social security is taxable. For those of you filing a joint return, the amount grows to $32,000.
Third, if you are thinking about taking the early retirement option (age 62 is the earliest you can get retirement benefits) and you earn over $37,680 annually, your benefits will be reduced one dollar for every three dollars of benefit.
Given where we are today economically and financially it just doesn’t make sense to think about social security as the cornerstone of your retirement plan. If you have questions on social security or your retirement planning, regardless if you are retired or not, we can assist you in choosing the right financial path specifically for your needs.
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Mr. Brandone is the President of Horizon Financial Services, a retirement, financial planning and wealth management firm in Del Mar CA. For questions he can be reached at 858-259-0131, ext 313 or via e-mail at mbrnadone@torreypinessecurities.com
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