By Dr. James M. Dahle, WCI Founder
I run into people all the time who argue that Social Security is not going to be there for them, so they're not counting on it. As near as I can tell, few of those folks actually understand what that means.
5 Reasons Why You Shouldn't Ignore Social Security in Your Retirement Calculations
#1 Social Security Isn't Going Anywhere
First of all, I don't personally think Social Security is going anywhere. In my opinion, this is one of the best government programs we have. Even if you don't think it's a good program, you cannot argue it is not immensely popular. The votes to abolish it simply are not there. No politician who ever expects to be reelected, ever, speaks out against it. 64 Million people are currently receiving benefits and they vote.
#2 Social Security Will Change
Now, Social Security's detractors have many good points. Social Security needs to be shored up. This isn't the first time though. It's been shored up before. The formula isn't that tough. You can raise the retirement age (my personal favorite solution), you can raise taxes a little, you can lower benefits (or even just the inflation adjustment) a bit, and you can tax the benefit a little more for some or all people. You could even take the benefit away from certain people, I suppose, but that also seems an unlikely solution.
People talk about “means-testing” Social Security. Well, guess what? It's already means tested. It's a very progressive system already, in that those who don't pay in much get a proportionally higher benefit and those with higher taxable income in retirement pay more in taxes on the benefit. Could it become MORE means-tested? I guess so, but I doubt we'll see anything too dramatic.
Even if Social Security is not fixed, your payment isn't projected to go to zero. It will still pay out 77% of what you are expecting.
Most likely, the solution to fixing Social Security will be a combination of the above, and it will be done at the last minute or perhaps gradually over years. But if you want to worry about an insolvent government program, worry about Medicare.
#3 Your Social Security Benefit Is Immensely Valuable
A typical high-income professional's Social Security benefit is extremely valuable. Take a look at your most recent Social Security statement if you don't agree. Mine says if I work until 70 (and thus continue to pay in the maximum Social Security tax every year from now until then) then my benefit will be $4,107 per month. Katie's says hers will be $2,977. Chances are we won't work until 70, so that will be a little lower than that. Let's call it $3,000 a month for me and $2,000 for Katie, starting at age 70, although if I quit working today I'd only get $2,592 at age 70. So $5,000 total a month, or $60K a year, adjusted to inflation and guaranteed until we die. If you want an even more accurate projection try WCICON speaker Mike Piper's opensocialsecurity.com.
So the question is, where else can I buy something like that from and at what price? Well, insurance companies sell SPIAs, but nobody is really selling inflation-indexed SPIAs. You used to be able to buy them, though, and at age 70 you could get a SPIA that pays almost 4% at age 70 (rates were a little higher the last time I was able to price one of these). The guarantee isn't quite as good as one from the government, but it's almost surely good enough. So that annuity is worth $60K/0.04 = $1.5 Million. It's not quite a military pension at age 38 with free health care forever, but it's better than a kick in the teeth.
#4 Increase Savings Rate by 10% or Work 8 Years Longer, Your Choice
So what does that mean? If you want to “ignore Social Security” in your calculations, then you're going to have to have a lot more money to retire safely than if you are going to include it. How much more? Well, $1.5 Million more in our case. Over 30 years at 5% real, that's $22,577 a year. For a doc making $225K a year, that's saving 10% more a year. Alternatively, let's assume you're saving $40K a year. You thought you were going to need $2 million to retire, but since you're ignoring Social Security, you now think you'll need $3.5 Million. How much longer will that take at 5% real while saving $40K a year? Well, it'll take 25.5 years to hit $2 Million, but it'll take 34.5 years to hit $3.5 Million.
So, you can ignore Social Security if you like, but you can't ignore the consequences of doing so. Those consequences are either saving 10% more of your salary or working an extra 9 years. Your choice. (I suppose some combination of the two would be okay too.)
#5 Play It by Ear
A better solution in my view is to just play it by ear. If you're thirty, maybe use your worries about Social Security to get you to save a little more than you otherwise would. If you're fifty-five and Social Security still looks like it's alive and kicking, well, maybe it's time to start counting on it a bit. Either way, I wouldn't discount your Social Security benefit by any more than 23% since they don't have to fix a thing to provide that to you.
What do you think? Do you count on Social Security when running your retirement projections? How do you do so? Do you discount it somehow? Why or why not? Comment below!
[This updated post was originally published in 2015.]
I agree that SS will not go away. I am 30 and counting on it to be there for me. My personal belief is that I won’t be able to draw until age 70, as I think raising the age of eligibility will be the most palatable and effective way to sustain the program. I plan on having my fixed expenses in retirement covered w/ SS, a pension from the army, and a SPIA for any leftover need. Thanks for not going all doom and gloom about SS, it is refreshing to read a financial blog that has a little more faith.
I am not counting on it, as on an accounting basis, but I do expect it to be there. They will likely have to raise the age at the very least, as life expectancies have increased and the age for benefits hasnt. This is a morbid way of looking at it but its always been that way. I know it fires people up but its better than it going away completely, tough choices but they have to be made.
If you don’t already know the amount of your estimated Social Security retirement benefits (including your Social Security disability insurance), you can download from directly from Social Security at http://www.ssa.gov/myaccount.
Presuming you’re married, be advised that when your spouse dies during retirement, the surviving spouse gets the greater of either spouses retirement benefit, not both, plus a $255 death benefit. Effectively erasing half of retirement benefit (which may affect your retirement plans), presuming two spouses whose earnings exceeded the FICA cap.
So a question for WCI, what are your thoughts about insuring the inevitable loss of either spouses’ SS retirement benefits using permanent life insurance either Whole Life (I read your WL myths) or Guaranteed Universal Life.
Depends on the situation. As a general rule, only buy insurance against financial catastrophes as on average, it’s a money losing proposition. Consider a couple who have $2M. His SS is $30K a year. Hers is $10K a year, so she instead takes half of his, $15K a year. In total, they get $45K a year plus perhaps $80K from their portfolio. Let’s say he dies. Now, she gets $30K from SS, plus $80K a year. Two lived on $125K. It doesn’t seem a big deal to me for one to live on $110K. That doesn’t sound like a financial catastrophe, so I wouldn’t buy insurance against that event.
Now, take another couple. He gets $20K a year. She gets $20K a year. They have a $200K portfolio providing perhaps another $8K a year. Now if he dies she goes from $48K to $28K. Much more of a catastrophe. Of course, also much more difficult to afford the permanent life policy. If they had lots of extra money they ought to have a portfolio much larger than $200K!
As many of you are aware – Congress and the White House passed a Budget Act this week that did make major changes to Social Security.
Starting in 2016 – there will be significant changes. I have attached two linked below to help you learn more about the changes –
1) This first link more clearly defines what changes and how that impacts claiming strategies and what to do moving forward in 2016.
http://www.forbes.com/sites/jamiehopkins/2015/11/04/the-state-of-file-and-suspend-where-the-new-social-security-rules-leave-seniors/
2) This link discusses some of the policy implications and changes taking place.
http://www.forbes.com/sites/jamiehopkins/2015/10/29/new-budget-deal-is-cutting-your-social-security-benefits-and-its-a-good-thing/
Michael- Thanks for the links. Sounds like you need to sign-up for the free newsletter though. This was the “Tip of the Month” for November.
Done.
Good thing I started with, “As many of you are aware . . .”
I am 50 and in the late innings of my career (I hope not to go into extras!). My approach is to not count on it. If it’s there, great. If not, it will be okay, too.
My guess is that there are other financial events and concerns with a negative consequence out there in my future that the positive “surprise” of a social security payment will help me weather.
Agreed. I’m definitely counting on it as a safety net, to cover a personal catastrophe. If everything goes well and it also happens to be there, so be it. Aside from being overly cautious with planning and paying more tax in retirement, I don’t think that ignoring it on a personal level is particularly hurtful (for me it would simply mean more available in the budget to donate/spend/estate).
All that said, I have an extremely dim view that it will be there for *successful* savers–with a 2/3 majority it will disappear with ease. Of course, the same could be said for all of one’s retirement savings….
The irony of the post is that in the first paragraph you tell people that you are ignoring the problem. I run into a lot of people who have no idea what is meant by fixing Social Security. Increasing the retirement age to 69 saves about 12% of the shortfall. So you are going to wait until 69, and your benefits will be reduced by 20% instead of 22%.
This piece explains the depth of the problem that you are ignoring.
fedsmith dot com/2015/05/31/senator-grahams-magical-napkin/
I’m not sure what you’re saying. Here is the first paragraph:
I don’t understand why you think that paragraph says I am ignoring the problem.
Sorry. 1 into the second.
“First of all, I don’t personally think Social Security is going anywhere. ”
I think you seriously underestimate the size of the problem. For every dollar that the system has collected since inception, it has created a $1.50 of promises it can’t keep.
We will have something called Social Security, but isn’t going to do what it does today.
I don’t buy Smith’s argument that the relatively minor changes required to fix Social Security are going to break the economy.
We disagree on the concept of minor. The Trustees say that the system needs $10.7 trillion in 2014 dollars in order to kick the can. That isn’t fixed. That is the cost to make the Boomer’s problem an even larger problem for their kids.
So you don’t think raising the retirement age to 70, decreasing the benefits by 10%, and increasing the cap on SS earnings to $150K would essentially eliminate the issue? Or is it that you don’t view those changes as minor?
How quickly are you willing to raise the age? Traditionally the discussion is gradually or 1 month per year. Getting to 70 takes more than 40 years. So it does almost nothing, and it is largely an agreement that people who can’t vote will get less than we take. It is easy for us to agree to that.
I don’t view 10% reductions as minor when we can’t even agree to slow the rate of growth for ourselves.
Raising the age to 70 eliminates around 15% of the shortfall. 10% benefit cuts will deal with about 50% of the shortfall. Increasing the cap to $150 is 10-15%. That isn’t enough to even kick the can – assuming that you give 10% cuts immediately rather than phased in.
I’m willing to raise it instantaneously for anyone 55-60 or under and hit those over 55-60 in a lesser way. I’m under 60, so it’s hardly nailing those who can’t vote.
I’m okay with slowing the rate of growth too. According to your figures, my three “fixes” get us 80% of the way there. So make it age 71, 15% benefit cut, and increasing the cap to $200K. Whatever. The point is it is a simple mathematical/actuarial equation. It just takes the political will to do it. Compare that to fixing Medicare and you’ll see why I think SS is such a simple problem to fix.
Why not cut it for everyone immediately? Once you answer that question, you will find why your proposal doesn’t work.
You are proposing to put the highest cuts on people who have contributed the most. They already lose money on the system. But you are suggesting a 15% cut – mind you we can’t even slow the growth for existing retirees.
The reason that you can’t cut existing retirees is because you see them as unable to adapt. The people who you are making cuts on, are equally unable to adapt, but you aren’t ready to admit it yet. All you are doing is shifting poverty through time. Soon enough, the system is just as broken as it is today.
We are still paying pensions on Civil War service, so yes you are primarily hammering future retirees who haven’t even hit the workforce yet.
It is the same for 80 years: It will all work if our kids will just take less. That is the entire premise of your idea.
FYI, you might be 100% of the way to kicking the can. That will make the Boomers problem a problem for their kids. Congrats.
I disagree that those currently working are unable to adapt.
I also disagree this is “kicking the can.” I’m talking about changes that make it sustainable indefinitely. I’m not sure why you’re describing that as kicking the can.
There are two measures of the solvency gap. The financing gap is the 75 year measure. The other is the infinite, which is a funding gap.
When you speak of indefinitely, you are talking about the funding gap. No one talks about the funding gap because it is more than double the cost of the financing gap. The financing gap is the kick the can measure because at some point in the future the system falls off the table again.
No it does not mean that SS will work for 75 years. In 1983, the system had projected solvency for nearly 80 years. The forecasts were too optimistic, and 30 years later we are down to 18. If we get the same performance over the next 40 years, the time to get rid of all of the Boomers, you will be down to about 10 years of solvency. That is what I mean by making the Boomers’ problem a problem for their children.
joe the economist stated on October 5, 2015 that we are still paying pensions on Civil War service. That was correct up until May 31, 2020 when Irene Triplett, the last American to collect a Civil War pension, died at 90.
Thanks for the update. I didn’t have the detail…
RIP.
If I decide to retire early after ~20 years in the workforce then that’ll actually impact my SS benefits calculations significantly: it’s based off of the top 30 years of earnings, iirc, and making more than the FICA limit doesn’t help one a whit.
It’s based on 35 years. Of note, however, is that once you hit the second “bend point” the rate of income replacement goes down quite a bit. That is, further earnings have only a relatively modest impact on your eventual benefit.
http://www.ssa.gov/oact/cola/piaformula.html
Right, so in general you’re better off earning $4000 a month for 35 years than $8000 a month for 20.
I plugged in the 20 years @ $8k/month vs 35 years @ $4k/month scenarios in, in another sheet on the same spreadsheet linked below:
In current dollars with assumption of same FICA cap and same index value for simplicity:
20 years of work at $8,000/month nets one $2,011 if taken at age 66.
35 years of work at $4,000/month nets one $1,926 at that same age.
Given that the cumulative earnings of the 20 year worker are $571/month higher than that of the 35 year worker it does represent tilting the table towards the blue collar worker (14% difference in earnings, 4% difference in SS payments).
Thanks for the link to the actual formula, including 35 years + the bend point business. I plugged in some numbers that should be applicable to any physician (since we all should exceed the FICA limit, no matter what specialty):
https://docs.google.com/spreadsheets/d/1Ohwi4NmXt3JwVJ53bsDYit1qB0XR6Lay15hTnx2VQG8/edit?usp=sharing
For working 20 years at supra-FICA cap earnings, in current dollars using the assumptions of 3% FICA cap and 3% index factor change, then I work out that one should get about 77% of the maximum benefit as I derive it using the same assumptions.
That’s actually much better than I thought, and reflects the bend points more than anything: you’re losing out on monthly income that’d only count at the 15% level anyway due to being over the second bend point.
I would rather make social security the way my kids 529s are and privatize it. They are managed with lost cost mutual funds through a major broker (my state uses Vanguard). I want more control of the money I put away. Obviously if you need this you’d need a “public option” for those who either can’t or don’t put enough away.
How would you pay for existing retirees? The transition to a private option is more than $10 trillion dollars. It is more expense than just letting the system pay depleted benefits.
I agree. I’m not for privatizing it. It is a combination program- retirement savings PLUS a social safety net. It’s so easy to fix the current system with a few tweaks that it isn’t worth overhauling it. Don’t get me wrong, I think I’d come out ahead if it was privatized, but I don’t think it’s good policy.
You only come out ahead if you tell retirees to pound sand. No one is proposing that. I have an article coming out this week that concludes that privatization doesn’t fix SS. It changes it into something that it was never intended to be : forced savings. All of these plans are different. I put out an article on Bush’s 2005 version, one that was particularly bad.
You probably want to reconsider you concept of SS. It is neither savings nor a safety-net. To be a safety-net, it would have to be available to all Americans. That is another article though.
I’m not sure what your definition of ahead is. I’m not trying to get “ahead.” I want SS revenue to equal SS outgo on an annual, ongoing basis.
Actually, the whole point of this piece isn’t how to fix SS, which is where the comments seem headed. The point is that the system isn’t going away. If you believe it is, you’re welcome to that belief and I encourage you to plan your personal finances accordingly. Just realize the consequences of making that assumption.
Never mind. I took a look at your site. You don’t see these types of solutions as “fixing Social Security.” You view them as “Paying for SS.” Yes, I think we should pay for SS, not “fix” it, so we’re not going to agree on much.
The age of ss draw used to coincide with average life expectancy, now thats totally off. As much as a political bomb it is it has to be raised. This will solve a lot of the problems. The rest of your simple and reasonable changes, though not enjoyable would also go a long ways towards making things better.
Agree we can easily implement the new raised age immediately for anyone under 60 years of age, totally reasonable.
Zach,
Not really. Social Security has not be actuarially sound since inception. The greatest changes to life expectancy have occurred at a time when we are contributing to the system rather than collecting from it. For example, decreased infant mortality has made the system more solvent rather than less.
The retirement age has already been increased for many of these workers. The projected life prospects of a 67 year old in 2050 is about the same as that of a 65 year old in 2000. If you are going to increase the retirement age again – just cut to the chase and cut benefit levels directly.
There is no way anyone knows enough to say that a 67 year old in 2050 will have a similar lifespan as a 65 year old in 2000. Thats 50 years of what will likely be incremental and punctuated large jumps in overall health and longevity advances.
Its more likely to expect an albeit slow, but gradual increase in the active life of adults in 2050. A lot of genetics is just now showing its promise, and with our computational and technical prowess it will only increase.
In just the last 2 years Hep C went from a horribly unfun and not very effective treatment with long term consequences to being cured with a single pill with limited side effects in 12 weeks. This type of thing will continue, now that doesnt make it easier on the system but it will occur.
I’m not as optimistic as you. I think we’ve had most of the bang for our buck already in longevity issues. I wouldn’t be surprised if average lifespan increases less than a year or two over the next 100 years. I hope I’m wrong.
Life expectancy of a retiree is rising slowly. It rose more sharply up to about 2000, but has risen more slowly since that time. The biggest change is the statistical likelihood of reaching retirement.
Trees don’t grow to the sky and we’re not all going to live to be 120.
Actually they are called actuaries. Their estimates may not be correct, but they are used in forecasting the system. Today co-horts are living about 18 days longer per co-hort.
You can look up actuarial study 120.
This is the piece on Bush’s attempt.
http://thehill.com/blogs/congress-blog/economy-budget/253260-bushs-plan-would-not-have-fixed-social-security
I was a little surprised to see this commentary from “The White Coat Investor,” an invidual who has invested a great deal of time and effort into providing financial and investing advice to others, yet obviously has an unfortunate lack of understanding of economics, finance, monetary theory, and government. I don’t mean to be misunderstood as being simply insulting or inflammatory. But I strongly suggest you go to Mises.org and spend some time in their library. A few places to begin:
https://mises.org/library/distractions-social-security-debate
https://mises.org/library/myth-social-security-trust-fund
https://mises.org/library/social-security-scam
https://mises.org/library/means-testing-your-social-security-payments
https://mises.org/library/social-security-ponzi-scheme
Since this is not the appropriate venue for a protracted exposition on the subject, I wish to simply point out a few things for the casual reader;
The US Government is bankrupt.
Social Security is bankrupt.
The current ZIRP and QE programs are causing massive inflation, and setting the stage for a hyperinflation and possible currency collapse.
Social Security is a paternalistic government program to force citizens to save for retirement. I don’t think many here would disagree that saving for retirement is a critical part of a life plan, but would you also agree that using force and coercion against an adult is the proper way to accomplish this? Is Government the proper mechanism for the collection and/or distribution of charity?
Moral arguments aside, has the government done a better job of “investing” these funds than the individual investors could achieve either alone or in conjunction with an investment professional? What has been the average rate of return for the average Social Security investor? Does this typical line of thinking about investment apply to Social Security?
Perhaps answering these questions might preempt the discussion of “fixing” and “paying for” Social Security.
You’re right, not the appropriate venue.
ok…I guess any post with social security in it throws a wide net.
I have a vested pension from a previous corporate job that is $1700+ per month when I hit (I think) 65 years until I die…they tried to buy it out this last year for $36k lump sum…fat chance. I am 36 years old and that’s guaranteed money.
Social Security income is on our spreadsheets and projections but more of an asterisk than a line item.
Great article I think thx for posting…-Jon
Might as well run the numbers. It could be a good deal to take the lump sum, but probably not. Even at 7% growth, your money will only double 3 times between now and 65, and $280K isn’t going to provide an income of $20K a year. I think you’re right to keep the pension.
I’m not counting on it. I am considering it gravy / padding if it is there. I figure there’s a pretty decent chance that I will die before being eligible for benefits – benefits at age 70 don’t mean much if you die at age 68 – and if I do make it to whatever the age cut off is at that time, I predict that I will probably be deemed “too rich” and disqualified from receiving much or any benefits. Eliminating SS altogether or for the poor will never be popular, but taking it away from “the rich” doctors and other retired professionals “who don’t need it anyway” is probably not going to be a political hard sell. Whatever benefits I may possibly receive will also probably be taxed at a not insignificant tax rate. I can always reassess closer to retirement age when a lot of variables not known now are more clear, e.g., my health, and what changes Congress has made to SS between now and then. That could in theory make a difference in calculating when to retire, how long to keep working.
Also, perhaps it’s just a terminology thing, but I don’t consider the progressive taxation that SS is already subject to be “means testing”. The means testing I refer to that’s not here yet is reducing or eliminating SS benefits for “the rich”, however “rich” ends up being defined. Even one Republican presidential candidate has suggested this, this year.
Im not counting on it for my planning. My rationale is to be independent and plan without it. My other thought is that there has been some talk of having income limits into who is able to collect, trying to preserve it for those more destitute. In other words if you are financially stable with a decent enough income (who knows what that definition will be), you don’t need social security and hence are excluded form a benefit. While I cannot agree, and this essentially rewards those who don’t plan, and punishes those who do, I often times disagree with government action on several different things. IF I get anything it will be gravy and used for emergency or unplanned spending or charitable giving.
I “ignore” SS benefits in my retirement planning because I plan to retire ~20 years before I can collect. My financials must be really sound without Social Security in order for me to do that. If/When I ever collect SS, I’ll add it to my charitable donations.
One question I have (and maybe this is for another blog post) is how to take SS into account when retirement planning, especially for high income earners who will most likely retire early? It’s easy for me to calculate what I would need for retirement (based on my current spending indexed for inflation). It’s also easy for me to calculate SS benefits, both if I retired right now and in the future if I continue to work. But I’m unsure of how the two relate.
For example, say my calcs say that I need $3m to retire at age 55 to cover my spending for 35 years without any SS. Now assume I could expect $50k per year in SS starting at age 70. That’s a 15 year gap I have to cover with taxable and then retirement accounts until SS kicks in at a time that is most vulnerable to sequence of return risk.
So when do I know I’m “done playing the game”? It would seem to be as simple as adding up the total SS benefit to life expectancy and subtracting it from the total I need without any SS, but somehow that seems wrong given taxes and sequence risks of only pulling out of taxable for 5 years then IRA’s for 10. But maybe I’m over thinking it.
FireCalc is designed to handle stuff like this I believe. I’d start there is you’re looking for the most accurate projections possible.
Yes, SS is not going away, except for people on this site, b/ all of us will be mean tested/screwed out of our benefits. So don’t worry about it and stick to your investment plan including buying some gold and whole life insurance.
Raising the retirement age is a really bad idea. Almost all of the gains in life-span have been for people at the top of the income range. Many poor people have seen DECREASES in life expectancy in the past decades. And believe me, working until you are 70 is a lot harder if you work as a brick-layer than if you have a desk job.
Many people get way less than $54,000 a year from Social Security. To be eligible for that level of benefits, you need to make near or above the maximum taxed income each year for a lifetime. Reducing benefits would drastically increase the number of seniors who are living in poverty.
The only really fair way to solve the ss problem is to modestly raise taxes. I prefer to do this by increasing the salary cap, but a slightly higher tax rate would also be fine.
Raising retirement age is a bad idea because we aren’t (rich or poor) living all that much longer in retirement. I have spoken to SSA a couple of years ago, and they said that there is some correlation between wealth and life expectancy. They also said that there is a correlation between shorter life expectancy and disability. They said it was basically a wash.
The connection between Social Security and poverty is mostly a fairytale.
http://thehill.com/blogs/congress-blog/economy-budget/251672-social-security-is-not-an-anti-poverty-program
You can call $10.7 trillion modest, but that doesn’t mean that it is.
Really, truly believe that raising the age for social security is a really bad idea.
We are all doctors and have taken care of many patients who were laborers/physical work most of their adult life. They are 55, and basically broken down physically with many aches/pains and are just trying to hang on until 62 and retire.
Automatization will make it impossible to find work for older folks and in fact for younger folks as well. Within most of our life time 40h week will be ancient history. Rise of the machine, and innovation, will lead to over supply of food / resources. We will no longer measure wealth as we do today. People will live healthier, wealthier and longer and probably more meaningful life (for most part this has already happened for billions in latin / central america, asia /africa).
AS FAR AS THE NATIONAL DEBT:
Fantasy. Fiat money. Not based on reality. It can be decreed out of existence, just as fiat money is now loaned into existence (most of you have no idea as to what I am saying, thats too bad).
Look, we had the largest RE bubble few yrs ago. Economy went to hell, work force labor participation still below 1970’s, yet in these few yrs we doubled our national debt, and quadrupled our MONEY SUPPLY. So people aren’t working, yet money supply increases by 4 folds with VERY LOW INFLATION.
FAUTUR IS BRIGHT. Poor person in USA today lives better then kings of not too distant past
In a strange twist of fate I was just on My Social Security reminding myself what was in the system. After checking in I my next reading stop was WCI and I immediately noticed this post. How ironic. I’m in the “doubtful it will be there for me camp.”
It doesn’t much matter to me as I am probably fine with out (I’m early retired now). I was checking on what’s in kitty for me because I had this thought that if it is there when I’m 70 I’ll use it for charity. The projected amount is a mere $1500/month at age 70, because I never made all that much before starting a business that worked out well. I married an immigrant and we retired before she had enough years in the system. We’ve paid absolutely ridiculous amounts of tax over the years and still do, but that only shows up on the income side of the ledger not the ‘earned income’ side. If there is a means test I’ll probably be quickly voted off the island, so that’s why I don’t count on it. If it is there it will be a boon for one of my causes.
By the way I recommended WCI today in a post at Bogleheads. I’m not a doc and neither is he but I find your site one of the few that really shines for high income folks. Thanks for the work!
Why not save like Social Security would hypothetically fail? It seems like a prudent thing to do to plan for worst case scenario, much like using conservative assumptions and estimates with expected related to retirement portfolio return? Same line of reasoning IMHO. Most likely things will turn out with one having abundance in the long run if worst case scenario doesn’t happen?
So you’d rather work 5 years longer and leave millions to heirs? If that trade off is fine to you, then go for it. Same issue with using a 2% withdrawal rate. Yes, you’re sure not to get hosed, but at what consequence?
I agree that this program is likely not going anywhere but I plan to retire well before my SS benefits would kick in. Because of this, I don’t count them in my retirement calculations and consider it icing on the cake.
I used to get Social Security Statements once a year…..no longer get these.
Do you guys know how to get one’s social security statements again?
They no longer mail these statements. You have to create an online account at ssa.gov to view your earnings and projections.
Physician on Fire has a great blog post on social security bend points. I highly recommend everyone check it out.
My goal is to work at least until I hit my 2nd bend point before calling it quits (if I’ve reached my number of course). I agree that this is a great government program that isn’t going away.
What are your thoughts on Crowd street real estate and how secure is it for long term investment?
It’s a platform. Every deal on it is unique and due diligence is required. But the platform is fine.
I use scenarios with full 77% of promised benefits and with zero.
Although I agree that it is difficult to imagine SS ending entirely, I find it entirely plausible that high income people, like physicians, could be left out in the cold. Be denied any benefits based on income. Given benefits but taxing it all back. Or other methods to limit benefits they can keep to those with lower incomes.
I look at SS as something I would love to have but I don’t count on it.
I did not quit working the moment I thought I could afford to retire. My projected retirement age is a function of health and ability to work. It will not change based on what happens with SS.
Essentially you need to think about what will happen if your parents or in-laws come up short by 23%. And I think you need to reconsider you last statement. About 2/3rds of people over 50 have left a job – not by their choice. Once your job is terminated finding the next one is not easy.
“About 2/3rds of people over 50 have left a job – not by their choice. Once your job is terminated finding the next one is not easy.”
Either you did not understand me or I don’t understand you.
If I lose my job and cannot find another, then I will lose the “ability” to work. In order to work, there has to be demand for my services. Since my retirement will be determined by “health and ability to work”, that is covered under my plan.
Neither health nor ability to work depend on whatever I might get from Social Security.
Given the time between now and when I am likely to retire, I assume that SS will change, perhaps multiple times, before I stop working. That is why I run projections with zero for SS. Too uncertain to count on.
My kids consider SS to be a Ponzi scheme that will blow up long before they see a penny. They are definitely right about the Ponzi part. I hope they are wrong about the blow up but I suspect they are right that too.
Which politicians do you expect to vote to terminate Social Security completely? Go ahead and list them. I’ll wait. I bet you can’t find 30 in the house or 10 in the Senate and no serious presidential contender.
Even if we do nothing, it’ll still pay out 77% of what you expect. Go ahead and don’t count on it if you want, but there are consequences to that.
I think you have confused the 77% as a guarantee. It is a possibility, one that happens if we have wage growth that our country hasn’t seen in 50 years. It isn’t a guarantee. It is a stern warning about what might happen even in a very good economy. To illustrate, the 77% assumes that seniors continue to spend the same amount whether they are paid 77% or 100%. I am not sure I buy into that model.
Again, read what I said
“I agree that it is difficult to imagine SS ending entirely, ”
Which means I do NOT expect it to end entirely.
I DO suspect the effective benefits FOR CERTAIN PEOPLE to be cut, perhaps to zero. This would be based on their incomes, assets or some combination. It might be by not paying them. It might be by taxing it all back.
The only consequence of including zero SS in my planning is having to run another scenario. I don’t see accounting for the chance of getting nothing as having any other consequences. The alternative would be to ignore this risk. How would ignoring the risk make me better off?
Whether I get any SS and if so how much does not depend on whether I plan for zero. I can plan for all sorts of things that are completely beyond my control.
Planning for zero SS does not make it more likely. All it means is that if it happens, I have a plan.
I agree it’s a bigger risk for SS benefits to disappear for the well to do than for the poor, which I think is your main argument.
Thanks for the reply, you are right I did misunderstand your post. When people talk about ability to work too frequently they are talking about working to the legal age limit. Your kids may be right and may be wrong. The one thing that every experts agrees upon is …. the longer we wait the harder the crisis will be.
The 77% also depends on a series of assumptions about economic growth and labor force participation that may not come through. It was last generated before the COVID economic crisis, which is still going on. Unclear what it will do to the level and timing of the exhaustion of the trust fund. The Trustees will produce a new estimate this spring, but it still be based on guesses about the future.
Among the things I find it difficult to imagine is Congress and whoever is President allowing those cuts to go through for those on the bottom of the economic ladder. Losing 23%, or whatever, of benefits for a 70 year old retired physician would be disappointing but few would be in the poor house. For someone the same age who has essentially no savings and SS is their only means of meager support, it would be a disaster. If the choice becomes letting those people quite literally starve versus bleeding some money from those with multimillion dollar retirement accounts, I know what I expect politicians to do.
Is SS immensely popular? I would say amount seniors yes, they are now in the receiving line. Do those under age 46 like SS, I would say no?
It comes down to value. Is SS a good value? That depends on when you were born. If you were bon in 1875 and lived to age 65 you could expect to live an additional 13 years (combined male/female weighted average). In 1937, the first year SS-OASI collected payroll tax at 1% up to $3,000 a year (base/cap) the average SS wage was $1.275 a year. This worker would work just three years. This worker had a PIA of $103.69, aid a total of $76.91 payroll tax including interest. The benefit for this person was $26.52 per month. Based on this workers paid taxes including the employer, the max benefit that could be paid was just 56 cents a month. This person paid $1 in tax plus interest for $47.41 benefits.
Based on the 1939 benefit formula, it would take a full 37 years of working for any worker to fund their own benefit.
Thus up through 1973 no birth cohort who reached age 65 could have paid for their own benefits. However, it gets much worse. In 1950 congress paid a 77% COLA to all beneficiaries who were drawing benefits in 1949.
The benefit formula was changed and increase benefit through 1977 reaching nearly 60% of a workers wage in 1981. This meant no worker prior to retiring prior to 2005 paid enough to fund their own benefits.
How did SS-OASI last this long?
1. It used the “cash float” of young workers who would pay taxes yearly, but would not draw a benefit for 25-40 years. No different than writing a check knowing the account does not have the money to cover it, but hoping to get a deposit in their before it clears your bank. Instead of days, SS had years.
2. In 135 SS-OASI covered less than 50% of the work force. Those with low wage, unsteady wages or high income categories of workers were not included in SS. In 1950 when SS was about to go broke, Congress added 9 million of the non covered workers in 1935 to SS. This produced a short term revenue boost and SS was able to use a new “cash float” from millions of workers for years.
3. Congress began raising the payroll tax. From 1% to now 5.3%. The actuarial risk based tax rate for SS-OASI is 7.81%, but SS-OASI tax rate is 10.6%. This means workers are paying too much 26% more in taxes than the SS benefit is worth.
4. In 1983 Congress increased the retirement age starting for those born in 1938 and after. Yet the largest increase in life expectancy at age 65 occurred before 1935. For every one year increase in retirement age, one pays an additional one year in payroll tax, delays benefits by one year and reduced by one year the number of years they would have drawn. This means the worker must now live 2.5 years more for every one year increase in retirement age to recoup the cost of a one year delay.
5 Life expectancy is increasing buy at an ever slowing rate of change. To provide perspective on this a baby born in 2021 can expect to live just 18 days longer than a baby born in 2020 at age 67. This 18 additional days in benefits would cost the average worker just $2 a year in payroll tax to cover this 18 days worth of benefit at end of life. This is less than 0.25% cost impact and when compared to COLA which is 2.5 % is ten times more in just one year over 20 years in retirement!
7 Changes to SS-OASI will have no impact on the value of future benefits. If taxes increase, you pay more for the same scheduled benefit. If retirement age is increased, you work longer, pay more, delay benefits by one year for the same scheduled benefit. If nothing is done across the board cuts take place amounting to 23% in the first year and slowing increasing each year until equilibrium with the worker to beneficiary ratio is reached [birth rate per woman stabilizes]. In the end the most a person born after 1985 can expect in SS-OASI benefits is 29 cents back for each combined employee/employer payroll tax and interest.
8 In 1983 the big patch [Greenspan} commission proposal was passed by CONGRESS which began taxing SS benefits. In the beginning the exemption was nearly four times the average SS benefit and few benefits were taxes. However, the exemption of $32,000 for married filers is not indexed by inflation. By 2040 due to wage growth and no indexing for the SS benefit exemption 10% of your SS-OASI benefit will be taxed back [claw back tax]. By 2077 it will be close to 17% claw back rate.
9 Summarizing;
The tax on benefits is the same as a 10%+ benefit cut when compared to benefits prior to 1983
In 2035 across the board cuts of 23% will need to take place.
When the SS-OASI trust fund is exhausted and scheduled benefits cannot be paid, COLA is reduced to 0% each year thereafter. This is equivalent to a 20% benefit cut upfront and having that reduced benefit indexed by COLA.
So do you support SS-OASI knowing it is a lousy deal?
http://www.justsayno.50megs.com/ss.html
Interesting points. Of course, there is nothing an individual can do about the future of the program. All one can do, and this is the topic of the article, is decide how much to count on SS for their retirement.
Beyond that, good or bad, we are stuck with it.
If there were an option to take a lump sum and drop out of SS, many would take it. Since that is not an alternative, the future of the program factors into planning only to help determine how much, if any, to count on.