I was at a meeting at the home office of Northwestern Mutual several years ago. The woman who was speaking asked the group of 100 or more advisors to raise their hand if they thought Social Security was going to be around by the time they retired. I was the only person who raised his hand. She looked at me incredulously and said, you really think Social Security is going to be around? I told her, as long as people keep having sex and there are jobs, there is going to be Social Security.
I was at another lunch with our then United States Senator, Tom Udall. He asked the group of advisors what their clients were worried about, and I told him that younger people, in particular, were concerned that Social Security was not going to be around by the time they retired. He basically said that wasn’t a pressing issue at the moment. In Washington, the squeaky wheel gets the grease and Social Security was an issue that was getting kicked down the road.
What is Social Security?
President Franklin Roosevelt signed the Social Security Act on August 14, 1935 to promote the economic security of the nation’s people. Designed to pay workers aged 65 or older a continuing income after retirement, it also includes survivors’ insurance, disability insurance, Medicare and Supplemental Security Income.
In 2019, 1 in 5 people received a Social Security benefit. This includes 47 million retired workers and dependents, 10 million disabled workers and dependents and 6 million survivors of deceased workers. For this article, I am going to focus on the retirement income aspect of Social Security.
How Does Social Security Get Funded?
Social Security benefits are paid from the reserves of the Old-Age, Survivors, and Disability Insurance (OASDI) trust fund. The reserves are funded from dedicated tax revenues and interest on accumulated reserve holdings, which are invested in Treasury securities. Basically, the money we pay in Social Security taxes are sent to the OASDI trust fund which is then invested in Treasury securities and all of the SS benefits are paid from the trust fund. There’s more to it than this, but the basic premise is the government has this trust fund that is invested in Treasury securities. When people and businesses pay Social Security and Medicare taxes, they are added to the trust fund and the benefits are paid out of that fund.
Sex and Jobs…. Seriously?
If you think about it, everybody who works pays Social Security tax on their income up to $142,800 in 2021. In 2022 the amount of income increases to $147,000. This is called the contribution and benefit base. The OASDI wage rate is set at 6.2% for employees and employers, each.
In 1981, the population of the United States was 229.5 million people. In 2021, the population of the U.S. is 333.5 million people. I guess that pretty much takes care of the sex part! In 1981 the payroll job count was 91.5 million people. In 2021 that number is 161. 35 million people. I’m pretty sure most of those people are paying Social Security taxes.
Trust Fund Running Dry
Most people probably don’t know how Social Security works but when they are talking about “Social Security running out of money” they are talking about the trust fund being used up. At that point, the benefits would solely be funded by the payroll tax revenues versus tax revenues and interest earned from the trust fund.
If that were to happen, I would suspect that someone in Congress would hear the squeaky wheel and want to do something about it. It’s a pretty simple equation. You either raise the revenue by increasing the taxes, reduce the benefits, increase the time until a person is eligible to receive the benefits or some combination of all three. I guess we’ll have to see what happens in the future. My guess is the 47 million or so retired people will not want to see their benefits reduced. In addition to that, every single one of those people vote!
Social Security and Retirement Income
Most of the people who work with me as their financial advisor would be considered middle to upper middle class. A lot of my clients are close to or above the maximum Social Security income limits. Yet even these people rely on the income from Social Security in their retirement years. Here’s a little math.
If a person were to retire in 2021 and they had been at or above the maximum income limit, at full retirement age they would receive $3148.00 per month. That’s $37,776.00 per year. If the person was married, you could either add the spouse’s benefit from their own earning history or add the spousal benefit which is 50% of the other spouse’s full benefit. In our example that would add another $18,888.00 per year for a total Social Security benefit of $56,664.00.
Even if we were to use a 5% withdrawal rate, which some people consider high, this couple would need to have $1,133,280.00 invested to generate the income they will receive from Social Security. The average 401k balance for a person aged 65 is $216,720 with the median balance being $64,548.00. You can see the problem here. Even if a person has twice as much as the average, they could only generate approximately $30,000 per year of income from their 401k plan.
I don’t believe Social Security is going away. I don’t think benefits will be reduced in the future. Without Social Security I think a lot of retired people would be homeless. While it is very difficult to live on the Social Security benefit alone, without it, things would be even harder.
If you want to schedule a time to talk about your retirement income planning, click HERE. We can schedule a time to speak and help develop a plan to have an income that lasts as long as you do! As always, thanks for reading. KB