Social Security Woes

[AdrianC]

The Issues: Hillary Clinton And Donald Trump On Social Security And Medicare

http://www.npr.org/2016/10/06/496067982/the-issues-hillary-clinton-and-donald-trump-on-social-security-and-medicare

...forecasters expect the trust fund will be exhausted in about 20 years. Once that happens, there will still be enough money coming into the system from payroll taxes to cover about 75 percent of retirees' benefits. But in order to keep paying 100 percent, some changes will be needed. The sooner policymakers act, the less drastic those changes will need to be.

Clinton: One idea Clinton has floated is lifting the cap on income subject to the Social Security tax. Right now, income over $118,500 is not taxed for Social Security. If that cap were eliminated and benefits were unchanged, that would solve about 80 percent of Social Security's long-run funding problem.

This seems a reasonable solution. (But that's easy for me to say now I'm semi-retired and arranging my income to be below the cap...)

Trump: "We're going to bring our jobs back. We're going to make our economy incredible again."

Hmmm. Jobs we have. High paying jobs is what it would need.

[nereo]

To be fair, having more total jobs (e.g. a larger workforce) would go a long way towards eliminating the projected shortfall.  However, I'm skeptical that our society could generate "millions" of new jobs right now with our employment rate where it is, and I'm even more skeptical that Trump's plan would be able to do that (paritcularly if it stated trade wars and limited immigration and exported a lot of our current workers).  Ironically more high paying jobs would do little or nothing to change the SS trust fund (because currently higher income levels are untaxed).

Clinton's solution seems more likely to succeed.  It's also worth noting that the official SS projections are very conservative and are repeatedly revised, often upwards.

[Spork]

I tend to ignore anything presidential candidates say that are not presidential duties.  This will be handled (or ignored and left to fester) by Congress.  The president will just sign or veto it.  It doesn't matter what their ideas are.

[redbird]

I think it's just easier to try to plan for being able to get by without social security. If you end up actually getting a social security check when you reach the appropriate age, great! It's extra money to help you out. But it feels a bit risky to rely on that to live.

[nereo]

I think it's just easier to try to plan for being able to get by without social security. If you end up actually getting a social security check when you reach the appropriate age, great! It's extra money to help you out. But it feels a bit risky to rely on that to live.

Given the popularity and broad-based support for SS, I can't fathom NOT getting some level of SS benefits when I reach retirement age.  If we do nothing we're likely to see 74-80% of our projected benefits, which would still be a pretty thick cushion (safety net) for us.

[Paul der Krake]

An early retiree who pulls the plug at 35 has 3 decades to account for before Social Security kicks in. The difference in assets required to be able to withstand 60 years of retirement instead of 30 is minimal.

[Mr. Green]

An early retiree who pulls the plug at 35 has 3 decades to account for before Social Security kicks in. The difference in assets required to be able to withstand 60 years of retirement instead of 30 is minimal.

Not necessarily true. There are a number of historical examples where a retiree's portfolio is low enough after 30 years that it would not be able to run another 30 years. cFIREsim would still consider these cases "successful" for a 30 year period because they're above zero. Personally, I think it's naive to leave SS out of income scenarios, and in the case I described above it is the difference between bridging the gap over the second 30 years in a reduced portfolio and someone going back to work for quite a while to make up the difference.

I think the income cap being lifted will be the first thing to change. It's easy and it will have popular support because it doesn't affect anyone but the upper class. Medicare already doesn't have a cap. As a high earner, more of my salary isn't taxed by SS than is. And I can't complain I'll never see the benefit of that extra taxation because the benefit is based on cumulative earnings. It'll cause my benefits to go up in kind. It's only if I continued a high earning career into my 50's and 60s that I'd start to see the benefit drastically reduced (hitting the second inflection point). I'd gladly pay tax on the extra $150,000 if it meant the guarantee of a decent income when I was old. If anything I view it as ER insurance, in case I am in one of the historical models where my stash is slowly dwindling but I just can't bring myself to go back to work, or my healthcare costs are higher in old age.

[Tubby]

Create a donut hole in SS taxation. Keep tax on first $118500 just as it is (indexed for inflation of course). Next $250k or so is SS tax free. Everything above that gets his with a tax again. I don't want to penalize successful small businesspeople and professionals, but Zuckerburg, Gates, and Hillary's Wall Street banking friends can pay more as far as I'm concerned.

[Paul der Krake]

An early retiree who pulls the plug at 35 has 3 decades to account for before Social Security kicks in. The difference in assets required to be able to withstand 60 years of retirement instead of 30 is minimal.

Not necessarily true. There are a number of historical examples where a retiree's portfolio is low enough after 30 years that it would not be able to run another 30 years. cFIREsim would still consider these cases "successful" for a 30 year period because they're above zero. Personally, I think it's naive to leave SS out of income scenarios, and in the case I described above it is the difference between bridging the gap over the second 30 years in a reduced portfolio and someone going back to work for quite a while to make up the difference.

Right. You probably would want to pad the assets a little more, but not much more (and then you enter dreaded OMY territory...). My point was that if you have the discipline to save 1M (or whatever 3-4% SWR number you want) by age 35, adding an extra, say, 200k to bump it to 1.2M is pretty easy at this point, especially since you are likely in peak earning years.

Personally I think a conservative formula is to calculate your expected SS benefit, slash that by 50%, and see where that gets you. Then pad accordingly.

[Mr. Green]

Personally I think a conservative formula is to calculate your expected SS benefit, slash that by 50%, and see where that gets you. Then pad accordingly.

Our of curiosity, why slash it by 50% if we know they can do nothing and pay 74% of benefits until the next century (or something like that)?

[Paul der Krake]

Personally I think a conservative formula is to calculate your expected SS benefit, slash that by 50%, and see where that gets you. Then pad accordingly.

Our of curiosity, why slash it by 50% if we know they can do nothing and pay 74% of benefits until the next century (or something like that)?

50% is an easy lower bound number that happens to make back of the napkin calculations very easy. :)

The Social Security formula currently doesn't care whether your earn your wages (adjusted for inflation) over 10 years or 30 (see RootOfGood's excellent article on the subject), but that could very well change. Congress could decide to go after us welfare queens "who only worked 10 years!" or something along those lines.

I personally think there is a chance that we may see benefits slightly reduced in our lifetimes, but not by much. My crystal ball currently says I will see 95% of my benefits, but I'd rather not be beholden to the whims and moods of a notoriously divisive government program in a notoriously divided country. I am also not crazy enough to try and forecast my spending needs 4 decades in advance; so I save a little more than what's probably necessary.

[Mr. Green]

Personally I think a conservative formula is to calculate your expected SS benefit, slash that by 50%, and see where that gets you. Then pad accordingly.

Our of curiosity, why slash it by 50% if we know they can do nothing and pay 74% of benefits until the next century (or something like that)?

50% is an easy lower bound number that happens to make back of the napkin calculations very easy. :)

The Social Security formula currently doesn't care whether your earn your wages (adjusted for inflation) over 10 years or 30 (see RootOfGood's excellent article on the subject), but that could very well change. Congress could decide to go after us welfare queens "who only worked 10 years!" or something along those lines.

I personally think there is a chance that we may see benefits slightly reduced in our lifetimes, but not by much. My crystal ball currently says I will see 95% of my benefits, but I'd rather not be beholden to the whims and moods of a notoriously divisive government program in a notoriously divided country. I am also not crazy enough to try and forecast my spending needs 4 decades in advance; so I save a little more than what's probably necessary.

Makes sense. Your vocabulary is awesome for an 8 year old, BTW! :P

[AdrianC]

Ironically more high paying jobs would do little or nothing to change the SS trust fund (because currently higher income levels are untaxed).

By more high paying jobs I mean jobs that pay middle class salaries (say $60-80k), vs all those "We're hiring" signs I see for jobs paying $20-30K.

[nereo]

Ironically more high paying jobs would do little or nothing to change the SS trust fund (because currently higher income levels are untaxed).

By more high paying jobs I mean jobs that pay middle class salaries (say $60-80k), vs all those "We're hiring" signs I see for jobs paying $20-30K.

Well the devil is in the details.  If somehow a few hundred thousand of those $20-30k employees were boosted to $60k salaries it would help the SS trust fund.  Alternatively, if people who had previously not been in the work force (SAHP, immigrants, etc) took those jobs, it could actually hurt SS in the long run because there would be more people who would receive payouts.
If a bunch of 50-somethings who previously held entry level jobs suddenly work higher paying jobs the last 10 years of their career their SS benefits will increase drastically, thanks to the tiered payout system.  BUT, if those jobs instead go to people graduating college.... well they'll pay into the system for 4 decades.

[Jack]

An early retiree who pulls the plug at 35 has 3 decades to account for before Social Security kicks in. The difference in assets required to be able to withstand 60 years of retirement instead of 30 is minimal.

Not necessarily true. There are a number of historical examples where a retiree's portfolio is low enough after 30 years that it would not be able to run another 30 years. cFIREsim would still consider these cases "successful" for a 30 year period because they're above zero. Personally, I think it's naive to leave SS out of income scenarios, and in the case I described above it is the difference between bridging the gap over the second 30 years in a reduced portfolio and someone going back to work for quite a while to make up the difference.

I just did some testing in cFIREsim. The default settings show a 95% success rate for a 4% withdrawal rate over a 30-year retirement (e.g. a $1,000,000 portfolio to support $40,000/year spending). Modifying only retirement end date and portfolio starting value, I found that to match that 95% success rate for a 60-year retirement, you'd have to lower the withdrawal rate to about 3.7% (e.g. a $1,070,000 portfolio to support $40,000/year spending). If you've accumulated $1M by age 35, an extra $70k shouldn't take more than a year or so, so I'd agree that's "minimal."

[TheAnonOne]

I think in general the country has been skewing more "left" over the past 200 years. I see no reason why that would ever stop, programs never seem to get taken away, but new ones are added periodically. (Very quickly when you look at it over a persons life-time)

Think...

sweat shops, child labor, in the 1800s.
unions in the early 1900s
40h work week implemented
Income tax imposed
ss for only the last 2-5 years of ones life.

Now we are paying ss for 10-30 years of someones life, supporting people via various other welfare programs, ss tax has jumped many times.

If anything, I think you should plan for SS to get lowered but I think the payout will go UP in the next 50 years.

[tonysemail]

I just did some testing in cFIREsim. The default settings show a 95% success rate for a 4% withdrawal rate over a 30-year retirement (e.g. a $1,000,000 portfolio to support $40,000/year spending). Modifying only retirement end date and portfolio starting value, I found that to match that 95% success rate for a 60-year retirement, you'd have to lower the withdrawal rate to about 3.7% (e.g. a $1,070,000 portfolio to support $40,000/year spending). If you've accumulated $1M by age 35, an extra $70k shouldn't take more than a year or so, so I'd agree that's "minimal."

that's pretty much how I see it too. 
if you're at 65% savings rate, then 1 year is just enough to push you from 4% down to 3.7%.
But if the market is up or even if we're just talking about 2% dividend on a big stash, then it will be even less time.
OMY makes a lot of sense in your 30's.

[Paul der Krake]

An early retiree who pulls the plug at 35 has 3 decades to account for before Social Security kicks in. The difference in assets required to be able to withstand 60 years of retirement instead of 30 is minimal.

Not necessarily true. There are a number of historical examples where a retiree's portfolio is low enough after 30 years that it would not be able to run another 30 years. cFIREsim would still consider these cases "successful" for a 30 year period because they're above zero. Personally, I think it's naive to leave SS out of income scenarios, and in the case I described above it is the difference between bridging the gap over the second 30 years in a reduced portfolio and someone going back to work for quite a while to make up the difference.

I just did some testing in cFIREsim. The default settings show a 95% success rate for a 4% withdrawal rate over a 30-year retirement (e.g. a $1,000,000 portfolio to support $40,000/year spending). Modifying only retirement end date and portfolio starting value, I found that to match that 95% success rate for a 60-year retirement, you'd have to lower the withdrawal rate to about 3.7% (e.g. a $1,070,000 portfolio to support $40,000/year spending). If you've accumulated $1M by age 35, an extra $70k shouldn't take more than a year or so, so I'd agree that's "minimal."

Yep. Historical data supports the idea that any period above 30 years is pretty much the same. So theoretically, if you're truly ready to retire at 35, not getting SS at all shouldn't be an issue. However, the ability to make up for shortcomings decreases with age. Jumping back in the workforce or shifting my lifestyle around at 45 for a couple years is no big deal. At 70 when I'm old and cranky, not so much.

[Mr. Green]

An early retiree who pulls the plug at 35 has 3 decades to account for before Social Security kicks in. The difference in assets required to be able to withstand 60 years of retirement instead of 30 is minimal.

Not necessarily true. There are a number of historical examples where a retiree's portfolio is low enough after 30 years that it would not be able to run another 30 years. cFIREsim would still consider these cases "successful" for a 30 year period because they're above zero. Personally, I think it's naive to leave SS out of income scenarios, and in the case I described above it is the difference between bridging the gap over the second 30 years in a reduced portfolio and someone going back to work for quite a while to make up the difference.

I just did some testing in cFIREsim. The default settings show a 95% success rate for a 4% withdrawal rate over a 30-year retirement (e.g. a $1,000,000 portfolio to support $40,000/year spending). Modifying only retirement end date and portfolio starting value, I found that to match that 95% success rate for a 60-year retirement, you'd have to lower the withdrawal rate to about 3.7% (e.g. a $1,070,000 portfolio to support $40,000/year spending). If you've accumulated $1M by age 35, an extra $70k shouldn't take more than a year or so, so I'd agree that's "minimal."

Your numbers will be off a little bit because you added 30 years to the retirement period, which means you removed 30 scenarios from cFIREsim, because those 60 year periods haven't completed yet. Unfortunately, that change includes all of the 60's which contain some of the worst years for a portfolio. There are 11 years there, and two more in the early 70's, where the portfolio either failed or was well on its way to failure at the end of the 30 year period (not survivable for another 30 without SS or some other prop). So of the 30 runs you cut out, 13 of them are bad. I would say that's a far cry from 95% success, and they would definitely cause your SWR to go down even further than 3.7%.

[Jack]

I just did some testing in cFIREsim. The default settings show a 95% success rate for a 4% withdrawal rate over a 30-year retirement (e.g. a $1,000,000 portfolio to support $40,000/year spending). Modifying only retirement end date and portfolio starting value, I found that to match that 95% success rate for a 60-year retirement, you'd have to lower the withdrawal rate to about 3.7% (e.g. a $1,070,000 portfolio to support $40,000/year spending). If you've accumulated $1M by age 35, an extra $70k shouldn't take more than a year or so, so I'd agree that's "minimal."

Your numbers will be off a little bit because you added 30 years to the retirement period, which means you removed 30 scenarios from cFIREsim, because those 60 year periods haven't completed yet. Unfortunately, that change includes all of the 60's which contain some of the worst years for a portfolio. There are 11 years there, and two more in the early 70's, where the portfolio either failed or was well on its way to failure at the end of the 30 year period (not survivable for another 30 without SS or some other prop). So of the 30 runs you cut out, 13 of them are bad. I would say that's a far cry from 95% success, and they would definitely cause your SWR to go down even further than 3.7%.

Good point! Maybe we need to do a Monte Carlo simulation instead, to see what the "theoretical" difference in SWR would be between a 30-year and 60-year term.

[Paul der Krake]

And I believe immigrants who are working legally (and even some who are working illegally) pay into the system already.

Skilled workers (H1 and the like) pay a ton into the SS fund with no guarantee of being granted permanent residence later. It's quite infuriating to see hundreds of dollars disappear every month but knowing you can be sent packing in 30 days if the job ends for any reason.

[Arktinkerer]

Non-citizens can earn SS benefits.  A lot more rules apply though.