Author Topic: If Social Security is Plan A, itís time for Plan B  (Read 8296 times)

MacGyverIt

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If Social Security is Plan A, itís time for Plan B
« on: April 25, 2012, 05:00:29 PM »
How much (if at all) does social security figure into your retirement plans? Personally, I don't plan on it and I think any estimate provided by the govt should be reduced to adjust for, um, federal fiscal reality....

http://www.marketwatch.com/story/if-social-security-is-plan-a-its-time-for-plan-b-2012-04-25

"Absent major action by lawmakers, the annual reports say that the combined assets of the Old-Age and Survivors Insurance and the Disability Insurance trust funds will be exhausted in 2033. Thatís three years sooner than was projected last year. And the Disability Insurance, or DI, trust fund will be exhausted in 2016, two years earlier than last yearís estimate."

Enphuego

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Re: If Social Security is Plan A, itís time for Plan B
« Reply #1 on: April 25, 2012, 08:21:28 PM »
If nothing at all is done, Social Security will still be able to deliver 75% of it's benefits for the foreseeable future past 2033.  It's more likely that the government would just subsidize Social Security with other taxes or an increased contribution rate rather than cut the benefits.  I could see them doing something like cutting benefits for those that would get paid the most to make up the difference.  Perhaps more likely would be to slowly ramp up the retirement age.  Cutting Social Security benefits would be political suicide.  They might even allow young people from other countries to immigrate to fix the demographic problem.

I'd treat it like an investment in bonds that will deliver 70% of what it's supposed to pay out.  You should be able to adjust your savings rate or work an extra year or something to cover the risk.

grantmeaname

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Re: If Social Security is Plan A, itís time for Plan B
« Reply #2 on: April 25, 2012, 09:04:06 PM »
If nothing at all is done, Social Security will still be able to deliver 75% of it's benefits for the foreseeable future past 2033.
That's not how that works. If the social security fund is spending unsustainably, a 25% cut won't magically make it a sustainable withdrawal rate. If a democratic problem is altering the ratio of payees to contributors, cutting benefits by a quarter won't cure the ratio's imbalance.

It's more likely that the government would just subsidize Social Security with other taxes or an increased contribution rate rather than cut the benefits.  I could see them doing something like cutting benefits for those that would get paid the most to make up the difference.  Perhaps more likely would be to slowly ramp up the retirement age.  Cutting Social Security benefits would be political suicide.
Have you seen how politically impossible it is to even mention a raise in taxes in this political climate? I'm not necessarily saying that it'll be that hard in 20 years, but I am saying that you're underestimating how difficult it is from a congressional willpower standpoint. And don't think about cutting benefits... you'll have the elderly, who form a voter's majority, shrieking about how they're on a fixed income and how they can't afford it. And so on...

They might even allow young people from other countries to immigrate to fix the demographic problem.
As opposed to now, where young people aren't allowed to come to America? Seriously, what are you proposing here?

I don't mean to belittle you or anything, and I hope my town doesn't come across that way, but I don't think you are seeing how colossal a fiscal problem is, compared to how miniscule the political will to balance the budget is.

arebelspy

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Re: If Social Security is Plan A, itís time for Plan B
« Reply #3 on: April 25, 2012, 09:21:45 PM »
If nothing at all is done, Social Security will still be able to deliver 75% of it's benefits for the foreseeable future past 2033.
That's not how that works. If the social security fund is spending unsustainably, a 25% cut won't magically make it a sustainable withdrawal rate. If a democratic problem is altering the ratio of payees to contributors, cutting benefits by a quarter won't cure the ratio's imbalance.


That's absolutely how it works.  If we're overspending by 25% such that the current surplus / funds will run out in 20 years then at that point a cut to SS from current levels to 75% levels would "balance" the amount coming in versus going out.

Enphuego's statistic is exactly what I've read as well.

Okay, so new study says we're running out of that extra a little faster than we thought we would.  We have an issue to deal with, no doubt, but assuming you won't get ANY SS is to assume the US government is going to collapse.  That's about the only way you won't get any SS.  Set those two odds as equal to each other.  If you think there's an okay chance the government won't be here, plan on no SS.  Otherwise that sort of pessimism is ridiculous and flat out wrong.
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arebelspy

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Re: If Social Security is Plan A, itís time for Plan B
« Reply #4 on: April 25, 2012, 09:33:34 PM »
Read this thread from a few months ago where I debunk the idea of SS going away, with sources:
http://www.mrmoneymustache.com/forum/ask-a-mustachian/social-security-do-you-plan-on-it/

Even though the most paranoid say they don't plan on it, but it'll be a bonus when it happens generally agree that yes, they will collect SS.

Doom and gloom sells, but the truth is that it's just not that bad off.  It does need some tweaks, but it'll come out okay.  Breathe.  ;)
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sol

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Re: If Social Security is Plan A, itís time for Plan B
« Reply #5 on: April 25, 2012, 11:25:39 PM »
 
I could see them doing something like cutting benefits for those that would get paid the most to make up the difference.  Perhaps more likely would be to slowly ramp up the retirement age.  Cutting Social Security benefits would be political suicide.

My prediction is that they will do to Social Security what they have already done to the federal workforce.  Rather than calling it a paycut, they call it an extended pay freeze and let inflation do the rest.  They'll just stop adjusting social security payments up each year, so your benefit will be eroded each year by the inflation rate.  Spend twenty years in retirement and it's like they've cut their SS costs by half!  More than enough to cover any projected shortfalls.

And that's assuming inflation stays tame.  If we see another period like the 70s, then it won't take more than a couple of consecutive years to have the same effect. 

shedinator

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Re: If Social Security is Plan A, itís time for Plan B
« Reply #6 on: April 26, 2012, 06:18:22 AM »
Hasn't it been pretty thoroughly established that those "trust funds" don't actually exist? I thought it was common knowledge at this point that the gov't had been using SS surpluses to balance out other parts of the budget. This whole freak out over SS is a result of the fact that the current generation that makes up the majority of retirees (boomers) is larger than the generations in the work force, so we're not generating a sustainable amount of SS tax. By 2033, a lot of current retirees will be dead, and if population figures hold, we should have reached a more sustainable balance between work force and retirees. If the current system really can survive for 21 more years, then it will probably just take a few minor tweaks (like means testing) to make it so that there's no noticeable drop in benefits.

James

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Re: If Social Security is Plan A, it’s time for Plan B
« Reply #7 on: April 26, 2012, 07:49:46 AM »
Hasn't it been pretty thoroughly established that those "trust funds" don't actually exist? I thought it was common knowledge at this point that the gov't had been using SS surpluses to balance out other parts of the budget.

The trust funds does exist, what is common knowledge is that the money in the trust fund is invested in government securities.  This is better than the money just sitting in cash in some vault, at least it's earning some interest.  Yes, the federal government is spending that money it borrows from the trust fund, just like it's spending money it borrows from Japan and China.
 
If you opened a trust fund yourself and purchased US savings bonds for your children in the account that would be similar to what the SS trust fund is.  The money exists as bonds owed by the US government.  Of course that means we are spending it on other things in the mean time, but saying it "doesn't exist" is just not acurate in any way.  Personally I think we missed a huge opportunity with the Bush plan of allowing individuals to invest some of their SS money outside of bonds to get a better return over time, but unfortunately that was shot down by short term thinkers.

Edited to mention that the trust fund was still added to this year, since the interest on the trust fund was enough to pay the shortfall of the SS money coming in, while still adding to the balance.  Shortly the interest from the fund won't cover the shortfall, and then we will start spending the principle of the fund to cover the shortfall each year.  Money to cover this from the general fund is part of the predicted deficits for future years, but in the budget it's shown as paying back the securities in the trust fund, not directly to SS itself.
« Last Edit: April 26, 2012, 08:00:38 AM by James »

James

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Re: If Social Security is Plan A, itís time for Plan B
« Reply #8 on: April 26, 2012, 08:12:29 AM »
I don't mean to belittle you or anything, and I hope my town doesn't come across that way...

Fyi, your tone does come across that way a bit.
 
When push comes to shove something will be done.  No one here suggested it will be simple or easy, especially with the lack of political willpower, but in the end something will be done because it has to be done.  Look at Greece, eventually things change...

bdub

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Re: If Social Security is Plan A, itís time for Plan B
« Reply #9 on: April 26, 2012, 08:57:55 AM »
Yes, the trust fund does exist but it is money owed to the government by the government.  So any balance in the fund is only on paper.  What truly matters for the government is the cash flow perspective: when annual payouts exceed incoming funds (which James pointed out will be happening soon).  How does the government make up the difference?  It cashes in the treasury securities to itself.    The treasury gets the money for the sold security by selling DIFFERENT bonds which ultimately get paid of by the Fed printing more money since we run an account deficit. 

Despite what the Fed says, the likely plan to resolve all of our federal debt issues (including SS) is through inflation.  This doesn't require political will as there is no need to cut benefits or raises taxes, just limit COL adjustments to "core" inflation so effective payout is less than real inflation (this change happened a few years ago).  The recession was the opportunity to increase the supply through TARP and "quantitative easing", now there just needs to be a stabilization of the credit markets to get that money moving.  Of course, the problem with this plan is that the national debt is growing FASTER than inflation and will continue to do so for the foreseeable future because of the REAL giant elephant in the room:  Medicare.

So to respond to the OP, yes I expect to get my fully committed SS benefits but I do not expect them to have the same purchasing power as today (I assume a 50% "real" value for those benefits).  I also reduce my expected returns by another 50% since I don't plan on working past 45 which will reduce my benefits.  Overall, I assume a net of 25%, which is more like the dessert than the meat and potatoes of my retirement plans.

Sidenote:  The supply of money has increased more than 60% in the last 10 years (http://seekingalpha.com/article/258513-exploring-money-supply-over-the-past-10-years-through-charts.  To this point in time, real inflation has been relatively tame over that time period due to the recession (since inflation = supply x velocity, velocity is limited by the credit markets currently). Once the world economy stabilizes, look out for inflation.

bdub

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Re: If Social Security is Plan A, itís time for Plan B
« Reply #10 on: April 26, 2012, 09:04:38 AM »
  Look at Greece, eventually things change...

Actually, very little has changed in Greece.  Their austerity plans have been rejected by the people and they continue to run very large account deficits.

IMHO, the Greek debt crisis will not be resolved until they are removed from the Euro zone (along with Spain and Portugal) and are allowed to create their own currency.  They will then be able to devalue to the point of making their exports attractive to people outside of their country.  OR, the EU will simply payoff their debt and kick the can down the road a little while longer (which isn't feasible for Spain and Portugal).

James

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Re: If Social Security is Plan A, itís time for Plan B
« Reply #11 on: April 26, 2012, 10:07:15 AM »
 
Actually, very little has changed in Greece.  Their austerity plans have been rejected by the people and they continue to run very large account deficits.

Both of your posts have excellent points I hadn't fully considered.  While I'm not quite as pesimistic about the purchasing power decrease in SS, I also don't plan on depending on it to any great extent either.
 
 

grantmeaname

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Re: If Social Security is Plan A, itís time for Plan B
« Reply #12 on: April 26, 2012, 10:13:53 AM »
very little has changed in Greece.
Exactly! This is my point! The government is capable of making loud noises and sounding like it'll change things, but in the end it's really just capable of making insignificant adjustments. James, I'm not saying there's not any political willpower, but that there can't be. Again, Americans over 65 are a voting majority. More than half of the votes directly come from people eligible to receive or currently receiving these benefits.

the principle of the fund to cover the shortfall each year.
The principal of the fund doesn't really exist. The government spent the money that should have been the "principal" of the social security funds as it came in in exchange for treasury-backed securities, then used the income to report a surplus (Clinton years) or under-report the deficit (everyone else). For the SSA to redeem the principal, the government would now have to raise regular, non-FICA tax contributions in order to pay for those securities. This is distinct from and unrelated to raising FICA to fix any cash-flow problems in the coming years due to the boomer demographic problem.

That's absolutely how it works.  If we're overspending by 25% such that the current surplus / funds will run out in 20 years then at that point a cut to SS from current levels to 75% levels would "balance" the amount coming in versus going out.
Sorry, I somehow missed the fact that the "insolvency in the teens" perspective was due to the demographic glut of the boomers and that the country is righting itself (so to speak, from the SSA's perspective) afterwards (2033+). That makes much more sense. Or am I mistating that again?

James

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Re: If Social Security is Plan A, itís time for Plan B
« Reply #13 on: April 26, 2012, 10:47:13 AM »
The principal of the fund doesn't really exist. The government spent the money that should have been the "principal" of the social security funds as it came in in exchange for treasury-backed securities, then used the income to report a surplus (Clinton years) or under-report the deficit (everyone else). For the SSA to redeem the principal, the government would now have to raise regular, non-FICA tax contributions in order to pay for those securities. This is distinct from and unrelated to raising FICA to fix any cash-flow problems in the coming years due to the boomer demographic problem.

If I gave you a $100,000 government savings bond would you go home and burn it?  The money paid for that bond has already been spent and no longer exists, just like the trust fund money.  If the trust fund doesn't exist then neither does the value of that bond.  Yet you wouldn't burn it would you?  You would recognize that value exists in that bond based on "the full faith and credit of the US government".  Absolutely the value of the fund depends on the ability of the government to raise those funds from the people by means of taxes, but that ability is very real, therefore the value of that fund is very real.
 
I happen to think it's a horrible system and a very poor value for the money put into it, but that is different than whether the trust fund exists or has value. 
 
Oh, and can you provide a citation for "Americans over 65 are a voting majority."?  They are a strong block, (maybe in the neighborhood of 25%?) but I don't believe they are a majority...

arebelspy

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Re: If Social Security is Plan A, itís time for Plan B
« Reply #14 on: April 26, 2012, 11:04:22 AM »
I agree with bdub about the havoc inflation causes.

If you still work up to close to your SS age, it doesn't affect you as much.  Your wages will increase with inflation, and so your SS will be larger.

If you ER for 15-20+ years before you collect SS, yes, it will have been eroded by inflation.

This is a separate issue from SS not existing, the fear that the media often tries to play up that is flat out wrong.
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bdub

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Re: If Social Security is Plan A, itís time for Plan B
« Reply #15 on: April 26, 2012, 05:41:14 PM »
Absolutely the value of the fund depends on the ability of the government to raise those funds from the people by means of taxes, but that ability is very real, therefore the value of that fund is very real.

I don't mean to quibble James, but the way government funds itself is NOT entirely through taxes, is is also done through borrowing.  The difference with a government bond is that they control the currency.  For example, I could sell you a 100,000 bdub bond and pay you back in bdubs I print.  Obviously, it isn't this straight forward and our currency does not reside in a vacuum.  At the end of the day, investors rely on the US government being able to raise the money from the taxpayer at some point in the future either through taxes or GDP growth.  The fact that the dollar is the world's reserve currency shows that the world thinks we are the most likely sovereign nation to be able to return investor's wealth and that we won't simply inflate away the value of their investment.  They expect we will generate returns because of our very robust and elastic economy.  At some point, investors may decide that our fiscal policies aren't the best and move away from the dollar.  It hasn't happened yet, but if/when it does, it will probably happen a lot quicker than most people expect.  One only needs to look at the collapse of a relatively small player (Lehman Bros) and the complete freezing of the world's credit markets to see how truly irrational the market can be.

James

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Re: If Social Security is Plan A, itís time for Plan B
« Reply #16 on: April 27, 2012, 12:41:59 PM »
Good points bdub and well reasoned, in the end I think we probably agree on more than the points we might quibble about.  :)

bdub

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Re: If Social Security is Plan A, itís time for Plan B
« Reply #17 on: April 27, 2012, 08:15:53 PM »
Agreed!