Author Topic: Social Security will be down to 80% of obligations in 2035  (Read 6664 times)

ch12

  • Pencil Stache
  • ****
  • Posts: 593
Social Security will be down to 80% of obligations in 2035
« on: September 21, 2012, 11:16:13 PM »
In April, Tim Geithner went on the record saying that SS will still be there in the future. However, the tax income that it's getting is only enough to cover 80% of its obligations. The other 20% is covered by the SS fund, which is due to run out in 2035. http://www.businessweek.com/news/2012-04-23/social-security-fund-to-run-out-in-2035-trustees-say

Should Mustachians rely on 80% SS in the future or just pretend that it's not going to be there?

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28287
  • Age: -999
  • Location: Seattle, WA
Re: Social Security will be down to 80% of obligations in 2035
« Reply #1 on: September 22, 2012, 08:50:22 AM »
We've discussed this before, but thanks for the link to the article. Looks like we're in the same place, not too shabby.

I'm betting they'll make changes (means testing, raising eligibility age, raise collected amount, etc.) in the next few decades.

But even if no changes are made, ever, 80% is covered by incoming funds.

Tell me again why someone would assume they won't get any SS at all?
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

MooreBonds

  • Stubble
  • **
  • Posts: 193
  • Age: 43
  • Location: St. Louis, MO
Re: Social Security will be down to 80% of obligations in 2035
« Reply #2 on: September 22, 2012, 10:10:39 AM »
We've discussed this before, but thanks for the link to the article. Looks like we're in the same place, not too shabby.

I'm betting they'll make changes (means testing, raising eligibility age, raise collected amount, etc.) in the next few decades.

But even if no changes are made, ever, 80% is covered by incoming funds.

Tell me again why someone would assume they won't get any SS at all?

Personally, since I'm just 35, I don't use SS projections into my planning, and only look at my overall portfolio and dividend income for now. As I get closer to 55, I'll start seeing what the SS landscape looks like at that time. So, effectively, I don't assume any SS for now.

It is true that changing nothing in the current laws will still result in funding 80% of your projections...but do you really think that the lower/middle class will accept 80% of their projections at retirement, given all the people that apparently rely solely on SS for the majority of their sustenance? If they can barely make it now on 100% of their projections, they won't make it on 80% of it 30 years from now. Which will require massive redistribution to bump up the lower/middle class to 100% of their projections - a bump that will come at the expense of either wealthier SS recipients, and/or wealthy salary earners.

SS is a different beast from projecting investment returns and inflation. For returns and inflation, they are actually more random and unpredictable, to a certain degree - but you can get a glimpse of prior years to see what might be in store for the future.

However, when it comes to SS....while it is, in a sense, "guaranteed" to be there (as I don't think anyone would expect it to be completely done away with and something else put in place), it is actually - in some degree - more difficult to predict than investment returns and inflation assumptions! The reason being that it is mainly subject to the whims of whatever politicians happen to be in power at any particular point in time, and whatever deal they happen to strike. You can't buy a SS index fund and be 'guaranteed' to have a return that matches the market overall.

With a capitalist society, you can expect companies to - by and large - focus on maximizing profits. Because of this, you can look to industries/countries/products that you think might produce more profits longer term, and then invest accordingly. But when it comes to politicians, you are almost guaranteed to NEVER have a solution that is truly in the best interest of the country or of the citizenry overall, since it is usually special interests and personal whims (on both sides of the aisle) that help craft the particulars of major legislation like SS laws, rather than mathematical modeling to produce the most efficient, beneficial result.

As such, while you can overweight your portfolio in oil stocks if you think peak oil will bring about massively higher oil costs, you have no way of knowing what any particular SS reform legislation will look like and how it will effect you. Just as uncertainty spooks investors in equities, and leads to mispriced securities, many fiscally prudent people planning for an ER will price that 'SS uncertainty' into their projections.

Because of simple demographics (the lower/middle class reference earlier), the only way to bump up the lower/middle class to 100% of SS projections is to seriously hit the wealthier SS recipients/income earners, either through higher SS taxes now while working, and/or more taxes on your SS/interest/dividend income when you're retired. Either way, the upper-middle and upper class will pay more. What exactly you will pay is anyone's guess...but since some on personal finance forums earn a moderately high income (and/or save substantial assets because of fiscal prudence and responsibility), they will be hit somehow, someway. And since it's unknown what form that higher tax will take, some might simply assume zero SS, since between higher taxes now and/or in the future, it could effectively wash out whatever SS they might receive, and be a reasonable 'worst case safety assumption'.

Some people build in safety assumptions with a WR of just 2.5% or 3% to be on the slightly safe side (even if they're 55). Some people assume just a 1% real rate of return for their investments to be safe. Others might be safe and simply ignore SS, and use it as gravy money for whatever the end result is when they collect, given the uncertainty looming.

Zaga

  • Handlebar Stache
  • *****
  • Posts: 2384
  • Age: 40
  • Location: North of Pittsburgh, PA
    • A Wall of Hats
Re: Social Security will be down to 80% of obligations in 2035
« Reply #3 on: September 22, 2012, 10:20:02 AM »
Isn't the entire MMM philosophy based on retiring early?  And isn't social security payout based on the average of 35 or 40 years on your income?  So if you're retiring early that average will be very low, and your payout will therefore be very low anyways.  So who cares if you get a smaller amount from the tiny fraction of your late retirement income?  I'd rather depend on me and my savings than a government that is generally inept with money!

ch12

  • Pencil Stache
  • ****
  • Posts: 593
Re: Social Security will be down to 80% of obligations in 2035
« Reply #4 on: September 22, 2012, 02:09:22 PM »
SS is listed in MMM's article on safety margin. I think that's part of why I'm so interested in it. Also, my parents will be SS eligible in a few years, which means that I've been getting increasingly interested in what's going on with Social Security. I factor it into calculations about their retirement but right now I haven't been putting it into mine, since I haven't even properly entered the workforce yet. It's highly probable that Social Security will change dramatically by the time that I'm 67 or whatever they decide my full retirement age (FRA) should be.

@Zaga They take the sum of your highest 35 years of earnings adjusted for inflation, and divide by 420. That gives you your average indexed monthly earnings (AIME). The first $767 of that is multiplied by 90%. The amount between $767 and $4,624 is multiplied by 32%. Anything above that is multiplied by 15%. http://www.ssa.gov/pubs/10070.pdf

If you have earned a sum of $322,140 in today's dollars and have 40 retirement credits (10 years of work), then you'd get $600 per month guaranteed once you hit your FRA. If you're a Mustachian, then $600 per month until you die should get you excited. But if I don't think that I'll have $600 until I die, I cannot get as excited by Social Security.

I do appreciate the comments on how unpredictable the government is. I liked MooreBonds' point that we're just better off focusing on the part of retirement that's under our control. I think that I'm going to consider it gravy instead of an integral part of my plan or safety net. It's probably going to be there in some kind of form when I'm ancient, but it's impossible to project how that might work out.

Zaga

  • Handlebar Stache
  • *****
  • Posts: 2384
  • Age: 40
  • Location: North of Pittsburgh, PA
    • A Wall of Hats
Re: Social Security will be down to 80% of obligations in 2035
« Reply #5 on: September 23, 2012, 09:45:27 AM »
Thanks for the details ch12!  I guess my poorly phrased point was sort of what you said at the end, I'd rather worry about what's in my control and consider things out of my control as gravy :-)

I do appreciate that it's there, it is making my life much easier right now because both of my parents are collecting and therefore not dependent on me or my bothers!

MooreBonds

  • Stubble
  • **
  • Posts: 193
  • Age: 43
  • Location: St. Louis, MO
Re: Social Security will be down to 80% of obligations in 2035
« Reply #6 on: September 23, 2012, 10:29:50 AM »
I do appreciate the comments on how unpredictable the government is. I liked MooreBonds' point that we're just better off focusing on the part of retirement that's under our control. I think that I'm going to consider it gravy instead of an integral part of my plan or safety net. It's probably going to be there in some kind of form when I'm ancient, but it's impossible to project how that might work out.

Well, it's not so much an issue of 'SS not being under our control and a random event', but just the simple numbers behind it that WILL requiring higher taxes, that likely WILL impact those fiscally prudent folks that accumulate relatively substantial wealth.

Consider the changes of SS from inception to now:

1935 @ inception:
1% tax paid into the system from your income (withheld out of your paycheck). This was untaxed when you received it at retirement.

Now:
12.4% total tax on your income (6.2% from your paycheck, 6.2% paid direct by employer). Up to 85% is subject to taxes when you receive this (double taxation on 35% of it).

This is a HUGE increase in taxes paid into the system, AND amount subject to taxation. The reason is that demographic shifts required it over time - just as the current demographic shift (again) requires increases.

If you were saving in the 1960s and 1970s, would you have predicted that the part of your SS that's subject to taxes would go from 0% to 50%?...and then again from 50% up to 85% (depending on your total income) in 1994? Those are major increases, even without the periodic increased SS withholding you and your employer pay....and the % of SS subject to taxes is actually part of the federal budget tax rules, outside of the SS program. So you can get hit even more paying in, and possibly again when you receive it.

sol

  • Walrus Stache
  • *******
  • Posts: 8488
  • Age: 43
  • Location: Pacific Northwest
Re: Social Security will be down to 80% of obligations in 2035
« Reply #7 on: September 23, 2012, 11:11:42 AM »
Now:
12.4% total tax on your income (6.2% from your paycheck, 6.2% paid direct by employer). Up to 85% is subject to taxes when you receive this (double taxation on 35% of it).

This is a HUGE increase in taxes paid into the system,

That's not really a fair comparison without also noting the corresponding increases in benefits over time.

MooreBonds

  • Stubble
  • **
  • Posts: 193
  • Age: 43
  • Location: St. Louis, MO
Re: Social Security will be down to 80% of obligations in 2035
« Reply #8 on: September 23, 2012, 11:51:42 AM »
Now:
12.4% total tax on your income (6.2% from your paycheck, 6.2% paid direct by employer). Up to 85% is subject to taxes when you receive this (double taxation on 35% of it).

This is a HUGE increase in taxes paid into the system,

That's not really a fair comparison without also noting the corresponding increases in benefits over time.

Well, it is and it isn't.

Here's a .pdf of a study from the Urban Institute (non-partisan think tank) on estimated SS taxes paid vs benefits received:
http://www.urban.org/UploadedPDF/social-security-medicare-benefits-over-lifetime.pdf

It is difficult to tabulate such a study, so they used some reasonable assumptions. Page 3 shows a graph with a clear trend of SS taxes paid (yellow) vs SS benefits received (purple), holding assumptions constant, such as average wage level, collecting at full retirement age, etc.

Then factor in that SS benefits were 0% taxed in 1960, vs up to 85% taxable in 2010/2030, and there's even a much larger disparity between earlier generations receiving substantially more compared to what they paid in, vs later generations receiving (net after taxes) substantially less compared to what they paid in.

An important assumption in their study:
Quote
...It also assumes that benefits scheduled in law will be paid even if trust funds are exhausted.

This means that their calculation for 2030 is based on CURRENT SS taxes (i.e. 12.4% total), and CURRENT projected benefits (i.e. 100% of your SS projections). It is a known fact that current taxes will only pay 80% of projected benefits down the road - so when they inevitably increase SS taxes to pay for the 2030/2050 and future generations, the yellow SS taxes paid column will have to increase substantially just to keep the purple benefits received the same amount. Again, factor in income taxes on SS benefits, and that difference between SS taxes paid vs SS benefits received will be even greater for 2030 and later generations.

Jamesqf

  • Magnum Stache
  • ******
  • Posts: 4047
Re: Social Security will be down to 80% of obligations in 2035
« Reply #9 on: September 23, 2012, 12:52:55 PM »
Should Mustachians rely on 80% SS in the future or just pretend that it's not going to be there?

I think relying on it, or on any government program, is - ok, I'll be polite! - not a wise move.  Make your plans assuming it'll go away before you get anything from it, then anything you do get is gravy :-)

tooqk4u22

  • Handlebar Stache
  • *****
  • Posts: 2289
Re: Social Security will be down to 80% of obligations in 2035
« Reply #10 on: September 24, 2012, 08:08:43 AM »
I'm betting they'll make changes (means testing, raising eligibility age, raise collected amount, etc.) in the next few decades.

Tell me again why someone would assume they won't get any SS at all?

They will make all kinds of changes between now and then with the caveat that no changes will affect the baby boomers as they are the largest voting block and because they are broke need SSI dearly.

Of all the changes,  the means testing will be the one that can impact benefits the most because they can tie it to income (if you make more than $xxxx you are not eligible - partially doing that now) or they can say if you have more than $xxx in assets you are not eligible.


Now:
12.4% total tax on your income (6.2% from your paycheck, 6.2% paid direct by employer). Up to 85% is subject to taxes when you receive this (double taxation on 35% of it).

This is a HUGE increase in taxes paid into the system,

That's not really a fair comparison without also noting the corresponding increases in benefits over time.

The problem is that when SSI was created it was meant to be a safety net for the most needy, then it evolved to supplement retirement with the expectation that you live on 1/3 SSI, 1/3 Ssavings, and 1/3 pension, and now it is basically a retirement plan for most.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28287
  • Age: -999
  • Location: Seattle, WA
Re: Social Security will be down to 80% of obligations in 2035
« Reply #11 on: September 24, 2012, 08:53:59 AM »
I'm betting they'll make changes (means testing, raising eligibility age, raise collected amount, etc.) in the next few decades.

Tell me again why someone would assume they won't get any SS at all?

They will make all kinds of changes between now and then with the caveat that no changes will affect the baby boomers as they are the largest voting block and because they are broke need SSI dearly.

Of all the changes,  the means testing will be the one that can impact benefits the most because they can tie it to income (if you make more than $xxxx you are not eligible - partially doing that now) or they can say if you have more than $xxx in assets you are not eligible.


In general, stuff is rarely tied to assets/net worth, as that's really hard to prove.  Most likely means testing would be based on income, and most Mustachians shouldn't have a problem with that, as their spending would likely be below that threshold.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

tooqk4u22

  • Handlebar Stache
  • *****
  • Posts: 2289
Re: Social Security will be down to 80% of obligations in 2035
« Reply #12 on: September 24, 2012, 09:42:42 AM »
In general, stuff is rarely tied to assets/net worth, as that's really hard to prove.  Most likely means testing would be based on income, and most Mustachians shouldn't have a problem with that, as their spending would likely be below that threshold.

I agree it will most likely be income based, but it asset based is not out of the question (food stamps require less than $2000 in resources).  Also given the social entitlement/need direction that we have been going it is not hard for me to imagine a change that would basically eliminate SSI for people at a certain income threshold - so you say that MMM's will be below whatever the threshold will be I am thinking that it could be a direct offset to ones income (earned/passive) such that if you were supposed to get $25k per year in SSI benefits but you had $25k in dividend payments then your SSI would be zero. 

The full retirement age should be extended to 70 right now for everyone (including boomers) and that would largely fix the problem, but unfortunately that won't happen.