We had the chance to visit with Scott Stolz, Senior Vice President from Raymond James, and discuss something that is on many clients minds: Social Security.
Scott chose to first take us through an understanding of how Social Security actually works. As you probably see, Social Security takes money from your paycheck. In addition, your employer pays an equal amount. For years, the system has collected way more than it paid out in benefits. But, where did the extra money go? They lent it to other departments of the government.
That was all fine and well, until the year 2010, when the amount collected in payroll taxes was less than the amount paid out. So, the Social Security Administration started cashing in the bonds that they gave, and will continue to do so until around the year 2030. At that point, all of the bonds will have been cashed in, and the big question is: what then?
The short answer is, if no changes are made to Social Security, the amount of money coming in each year will probably cover around 77% of the benefits that they are expected to pay out. Therefore, with no changes, the benefits checks would have to be reduced by about 23% sometime around the year 2030 and after.
So, what should we do? In one sense, it seems foolhardy to rely on full benefits going forward past that year. Yet, this has been an incredibly successful social program, and it seems unlikely that an equal cut would be given to all participants. Perhaps Social Security will become a needs-based program, which makes some sense.
There is also every likelihood that other changes could be made. In 2016, wages were taxed up to $118,500, and that cap will rise to $127,200 in 2017. Wages above that are not subject to Social Security taxes. It would seem like a politically acceptable target to “tax the rich”, by simply raising this cap, and perhaps that is one partial solution.
In fairness to those we are so ready to tax, they get back far less of what they put in than a low wage earner. A low wage earner, say $15,000 per year, could get back 12% of their lifetime contribution in their first year alone, which means they will get it all back in about 8.5 years. Meanwhile someone earning consistently at the cap will get back about half of their contributions over their entire remaining lifetime.
Raising the retirement age may be another option. When social security was created, life expectancy was 63, which was also the starting age. This means half of the contributors never collected anything. It was never designed to be a retirement plan for most of Middle America. It was only supposed to be a supplement for half the people that lived longer than expected. With that in mind, Scott believes it is possible that the starting age and full retirement might continue to increase. If that happens, it is more likely to affect younger workers that have time to adapt.
So, what will it take to impose social security reform? This is a political hot potato, and unfortunately we may need to be much closer to the crisis point to gain the momentum needed. One possibility is that the government just makes up the difference out of the operating budget by reducing spending on something else. Hard choices will have to be made.
The bottom line is that there are really only a few levers to pull to solve this issue. Either benefits must be cut in some way, directly or indirectly through delaying the benefits, or taxes will have to go up, also either directly or indirectly. Either way, those that need it the least are probably going to have to contribute the most.
If you want to see how Social Security plays into your overall financial plan, give me a call.
Your friendly Green Bay Financial Advisor,
Any opinions are those of Patrick Stoa and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation