Article with clearest Social Security explanation

[EvenKeeled]

I was reading online about the future of SS in the USA in the last few days, wondering if I should include it in my retirement planning.

This article explains how it works more clearly than any other I've come across:
http://www.forbes.com/sites/johntharvey/2013/01/07/social-security-rerun/

What I got from it is this: Unless the government does away with SS, retired folks of a certain age will still get some benefits, even if it's reduced from the current rates they list.

It can't go bankrupt. Good to know!

[LAGuy]

I think it will be around in some form. The problem with including it in your retirement planning if you're retiring early, is that the amount that you'll get potentially is no more then a rounding error in your SWR at like 25+ years out. That is, since we want to retire early, we have to bake a lot of safety into our portfolio withdraw rates. As a result, we're more likely to be successful...quite possibly fantastically so, such that SS won't matter much. Trying to dial it in such that our assets are mostly (but not entirely!) depleted by the time we take SS is pretty much impossible. As such, I look at it as "old age insurance" should my withdrawal plan fail horribly and plan to take it at 70.

[LAGuy]

Sorry, just saw your age at 56. You absolutely should include it in your planning. If there's going to be changes, believe me, it won't be for those that are older then 50 to 55 tops at the time the change occurs (fat chance that will be anytime in the next 5 years).

[SwordGuy]

can't[/b] go bankrupt. Good to know!

But it can reduce benefits all the way to zero, which is, for those who paid into it and didn't collect any money back, functionally the same damn thing.

It's exactly the same for a landlord when the tenant doesn't pay the rent.  Doesn't matter whether the tenant spent the money on blow, hookers, star wars figures, medicine, or just doesn't feel like paying it.   The landlord is still out the money.

You can fancy up the words all you want, but SS is no different.     SS, Medicare, Medicaid and payments on the national debt take up about 50% of the federal budget.   

In the author's terms, that national debt represents spending tomorrow's productivity increases today (or before that, more accurately).  That means those needed productivity increases that will pay for SS, Medicare and Medicaid may not be around for that purpose.

I can assure you that the US can, in fact, go bankrupt.  Other countries have done it and we're certainly on that track.  We can print lots of money to avoid that, but that just means that much of what we saved will be trashed by inflation.   We had bad inflation earlier in my lifetime, but nothing as bad as other countries have experienced in the last 100 years.

[EvenKeeled]

I can assure you that the US can, in fact, go bankrupt.  Other countries have done it and we're certainly on that track.

I know next to nothing about economics, but I'm guessing that if the US goes bankrupt we'll have bigger problems than whether SS is still paying benefits.

[MoonShadow]

I can assure you that the US can, in fact, go bankrupt.  Other countries have done it and we're certainly on that track.

I know next to nothing about economics, but I'm guessing that if the US goes bankrupt we'll have bigger problems than whether SS is still paying benefits.

Indeed, but this would certainly contribute to the problems associated with a national bankruptcy.

[CanuckExpat]

I can assure you that the US can, in fact, go bankrupt.  Other countries have done it and we're certainly on that track.

I know next to nothing about economics, but I'm guessing that if the US goes bankrupt we'll have bigger problems than whether SS is still paying benefits.

Indeed, but this would certainly contribute to the problems associated with a national bankruptcy.

Well the US prints and controls its own currency, and the Constitution forces the US government to honor its debt (weird politics and government shutdown aside), so currently the more likely worse case scenario is hyper inflation:
You would get your social security, would have to cart bills around in a wheel barrow, and it wouldn't buy much :)

[sirdoug007]

can't[/b] go bankrupt. Good to know!

But it can reduce benefits all the way to zero, which is, for those who paid into it and didn't collect any money back, functionally the same damn thing.

It's exactly the same for a landlord when the tenant doesn't pay the rent.  Doesn't matter whether the tenant spent the money on blow, hookers, star wars figures, medicine, or just doesn't feel like paying it.   The landlord is still out the money.

You can fancy up the words all you want, but SS is no different.     SS, Medicare, Medicaid and payments on the national debt take up about 50% of the federal budget.   

In the author's terms, that national debt represents spending tomorrow's productivity increases today (or before that, more accurately).  That means those needed productivity increases that will pay for SS, Medicare and Medicaid may not be around for that purpose.

I can assure you that the US can, in fact, go bankrupt.  Other countries have done it and we're certainly on that track.  We can print lots of money to avoid that, but that just means that much of what we saved will be trashed by inflation.   We had bad inflation earlier in my lifetime, but nothing as bad as other countries have experienced in the last 100 years.

You don't seem to understand the article.  Payments can't go to zero unless SS taxes go to zero.  As long as there is a social security tax on earned income, that money will be available to distribute to retirees.

This has nothing to do with the national debt.  SS has a surplus, not a debt. 

The US government has had, and always will have, debt.  As long as economic growth continues the debt can increase and never even needs to be paid off as increased GDP leads to increased tax revenue which is used to pay increased interest on the debt.  None of which has anything to do with Social Security.

[SwordGuy]

That national debt (which has to be paid off) gets paid out of tax revenue.   So does social security.   You can't pay the same dollar to two different entities so someone will get the shaft if revenue drops off (which it does periodically) and expenses rise (which they ALWAYS do).  So, yes, it DOES have something to do with the national debt.   Right now that 18 TRILLION dollar national debt is paying almost nothing in interest.  Once interest rates start to rise back to normal levels we'll have a whole lot less money to pay into SS if we continue to pay our debt payments.

So what if SS can't go all the way to zero!  If I'm supposed to get $2000 a month and I get $20 a month, and I was counting on that $2000, I'll still be in the shit.

Same thing if we get $2000 but it's only worth $20 because of hyperinflation.   We'll still be in the shit.

All the fancy words in the universe don't change that reality.

We can hope that our economy will grow like gangbusters and we'll have huge budget surpluses that will be used to pay our obligations instead of get diverted into more debt-producing political pork.    Of course, we would have to have 36 years of $500 billion dollar surpluses to pay off that $18 trillion debt - assuming we borrowed at 0% interest.

[sirdoug007]

Why does it have to be paid off. It never has been in the past 239 years.

Read the article again. SS taxes are different from income taxes.


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[MoonShadow]

Why does it have to be paid off. It never has been in the past 239 years.

It still has to be serviced, which basicly means that it gets paid for every generation or so while it persists.  Much like paying interest only on credit cards.  It may be possible, but it's still not a good idea.

Read the article again. SS taxes are different from income taxes.

Except they are not.  They are, at best, separated within government; but that is akin to the left pocket owing the right pocket.  It's still all part of the government's obligations (one definition of an obligation is a debt owed in the future) and the SS taxes still contribute to the general fund & total revenue of the federal government.  The fact that the US Treasury then issues the SS fund special treasury bonds (that cannot be sold on the open market) for the balance of those tax revenues not paid out in current year benefits is mathematically irrelevant.

[fattest_foot]

That article seems to needlessly complicate it (probably because the author needs to fulfill a minimum word requirement).

• Social security, in its original form, had employees paying a portion of their paychecks to fund the retirement of retirees.
• The number of employees outnumbered the number of retirees (more cash flowing in than out) so the SS Trust Fund was established.
• The trust fund grew to over $2 Trillion over the years due to taking in too much money.
• Mostly due to the boomer generation, social security was no longer bringing in more money than it was taking in (more retirees than employees); so the trust fund started to be drawn on.
• When the trust fund runs out of money (the "doomsday" scenario sometime in the 2030's), social security doesn't just disappear. It will stay bring in money from employees and pay it out to retirees.

The end. So yeah, for someone in the millennial generation, you may not get the same payout that your parents are getting. But outside of social security being scrapped completely, you'll still have whatever revenue is brought in by the workforce that's around when you retire. Hell, it's entirely possible we have another massive population boom and start bringing in significantly more money than it's paying out.

[EricP]

Before this discussion spirals even further off course I'd like to state that you should definitely include it in your plans as you are already 56.

If you were younger then as others have mentioned it's a rounding error at the end of 25+ years of growth, but for you it's going t allow you to retire 3 or 4 years earlier probably.

[Syonyk]

SS future viability, of course, assuming that the actual economy continues to grow...  which with all sorts of headwinds (energy, demographics, debt, climate) is not a strong bet.

I'm in my 30s, and I pretty much don't assume SS will exist when I retire.  I pay into it, and will continue to do so, but I don't expect I'll get much actual value out of it.

My retirement plan also involves a lot of physical wealth - land, tools, high yield gardens, greenhouses and knowledge on aquaponics, etc.  Stuff that can, at a minimum, keep me and my family fed, with some surplus to trade.

If everything goes awesome, then I'm still eating damned well. :)

[Leanthree]

Social Security works by having current workers pay money to the government, the government then gives money to people over a certain age and disabled people as well as a few other things. It is very simple. People pretend like their money goes into some investment account and then is given back to them later in life but that is not the case. It is very simple.

Pretending like Social Security will disappear is like pretending public schooling might go away by the time you have grandkids. Yes, a few people think it should go away, and yes it is a very expensive program but it isn't going to go away. It might change, benefits might go down or taxes might go up or retirement age might go up to make it worth less, but it isn't going anywhere without a serious change to politics in America.

[Petunia 100]

Why does it have to be paid off. It never has been in the past 239 years.

It still has to be serviced, which basicly means that it gets paid for every generation or so while it persists.  Much like paying interest only on credit cards.  It may be possible, but it's still not a good idea.

Read the article again. SS taxes are different from income taxes.

Except they are not.  They are, at best, separated within government; but that is akin to the left pocket owing the right pocket.  It's still all part of the government's obligations (one definition of an obligation is a debt owed in the future) and the SS taxes still contribute to the general fund & total revenue of the federal government.  The fact that the US Treasury then issues the SS fund special treasury bonds (that cannot be sold on the open market) for the balance of those tax revenues not paid out in current year benefits is mathematically irrelevant.

Except they are.  :)

You're suggesting employees and the self-employed will pay a direct tax to fund SS and Medicare even though no one receives any benefits.  IMO, highly unlikely.

[MoonShadow]

Why does it have to be paid off. It never has been in the past 239 years.

It still has to be serviced, which basicly means that it gets paid for every generation or so while it persists.  Much like paying interest only on credit cards.  It may be possible, but it's still not a good idea.

Read the article again. SS taxes are different from income taxes.

Except they are not.  They are, at best, separated within government; but that is akin to the left pocket owing the right pocket.  It's still all part of the government's obligations (one definition of an obligation is a debt owed in the future) and the SS taxes still contribute to the general fund & total revenue of the federal government.  The fact that the US Treasury then issues the SS fund special treasury bonds (that cannot be sold on the open market) for the balance of those tax revenues not paid out in current year benefits is mathematically irrelevant.

Except they are.  :)

You're suggesting employees and the self-employed will pay a direct tax to fund SS and Medicare even though no one receives any benefits.  IMO, highly unlikely.

I don't think that you are going to be given a choice.