Hope you are all doing well. All three major indexes dropped slightly this week. The worst performer was the Nasdaq down 0.4%. In this week’s update I will provide my opinion on two questions many of you have asked.
How am I doing relative to my peers?
Many of you are Baby Boomers. A new retirement survey from Credit Karma released this week had some very interesting data about Baby Boomers (age 59 -77) and retirement savings. According to the survey, about 27% of people who are 59 or older have no retirement savings. About 1 in 5 people over 59 don’t have a retirement account. That is the highest percentage of any generation. The median retirement savings for Baby Boomers is $120,000. Which means if you have saved more than that you are doing better than the majority of your peers. Even more interesting is when asked, Boomers view 1.1 million dollars as the magic number they need to have saved for retirement. If you’ve read my book then you know that there is no magic number. It is based on your lifestyle and spending habits. I have had clients who have had less than $120,000 and have had perfectly happy retirements and I have had clients with over 1.1 million that have burned through money faster than anticipated. Every financial services company does this type of survey because they hope to glean data that will help provide them a catch all “cookie cutter” solution for this massive demographic of retirees. There is none, the only solution is to create a plan and track it by doing reviews. Which is what all of you are doing, so in that regard you are far ahead of your peers.
What do I think will happen with Social Security?
Here are the facts. The Social Security trust fund is slated to be depleted in 2033. That would result in a dramatic cut in benefits, with the 67 million retirees who depend on the program receiving only 77 cents for every $1 in benefits — a reduction that would hit the poorest Americans hardest, especially the 27% that have nothing saved for retirement. It will need to get fixed. The Social Security aged (62 and older) demographic votes with far more regularity, so Congress will look to tackle this problem in a way that does the least harm to those already receiving benefits. I will give my opinion on three possible solutions.
Means Testing and Reducing the Cost of Living Adjustment
Congress is not going to let people who depend on Social Security see a reduction in benefits. Means testing is one solution that is gaining traction. With means testing the true question is how much income do you need to have to not be viewed as dependent on Social Security in the eyes of Congress. We know the current administration views anyone making over $400,000 as the threshold for working aged Americans. However, those that meet that definition of wealth only make up an extremely small portion of the American population. Disqualifying them from receiving Social Security will have little to no impact on Social Security’s solvency. The income threshold for retirees could be much lower. To make a significant change in Social Security’s finances, it would be necessary to begin phasing out benefits for people with very modest incomes, in the range of $60,000-$70,000 annually – hardly wealthy in anyone’s book. In fact, a recent means test proposal would have reduced Social Security benefits for people with average annual earnings of only $49,000. This would end up being an extremely unpopular solution. It is for this reason I don’t think that means testing will be the ultimate fix. Many in Congress think the metric used to calculate COLAs is too generous and doesn’t reflect seniors’ lived experience. By using a different inflation gauge, benefits would grow more slowly. Some have advocated for capping the COLA or even eliminating it entirely which again would be devastating to those depending on it. I don’t think the COLA is going to change but I could see them eliminating the COLA if you make above a certain income. If they may put a means testing component to SS eligibility or the COLA I feel it will likely mirror the one in place for Medicare. Medicare premiums start increasing at 97k for single filers, and 194k for joint filers. I could see that being included as part of a fix but the heavy lifting will need to come from elsewhere.
Tax the Workers
The easiest fix for Congress is increase payroll taxes and increase the taxable minimum. Right now, employees and employers each contribute 6.2% of an employee’s pay in taxes to help fund Social Security. Increasing those rates would go a long way toward closing the shortfall. Only the first $160,200 of a worker’s earnings is subject to the 12.4% in Social Security taxes. Every dollar after that gets off scott free. The current arrangement means that roughly 85% of wages are subject to taxes. By increasing that to 90% of wages, or removing the cap altogether, Social Security’s finances could be improved. I think the cap will continue to rise and I wouldn’t be shocked if it is eliminated. Raising payroll taxes on the other hand is not a great idea, though, I think it will also happen. The unintended consequence of raising payroll taxes will be to further hurt the working age Americans who are living paycheck to paycheck. Which will further increase the wealth gap and could increase the division in our country. It also has the potential to further hurt small businesses. Congress many times fails to see the unintended consequences of increased taxes. The simple truth is lower income workers vote in much lower percentages than retirees and when forced to make a choice Congress will choose to impact workers over retirees.
Raise the Age to Start Collecting Social Security
They have done it before and I believe they will do it again. In 1983, Congress passed legislation that moved the Full Retirement Age from 65 to 67. It impacted those born after 1946. This is the most logical solution. People are living longer and younger Americans are saving more and don’t view Social Security as something they are depending on. The current full retirement age is 66 to 67, depending on when you were born. You can start earlier but if you start receiving benefits before this age, and your monthly payment is lower and you are subject to a very restrictive earnings test. I see Congress potentially raising the full retirement age to 70 for those born after 1982 and raising the age in increments for those born between 1965-1982. I think they will keep the option of starting benefits at 62 but perhaps increase the reduction if you do. Raising this threshold would help improve the program’s overall finances as it would slowly make more people ineligible for longer. The other way we can improve Social Security is to get more younger workers paying into Social Security. There are less workers relative to retirees now than at any point in Social Security’s existence. In 2000 there were 3.4 workers for every retiree (it was 5.1 in 1960). In 2030 that number will drop below 2.2. Immigration is a way to fix this problem, it is a hot button issue now it will get much more significant in the years to come.
If you’d like to speak about your investments or your plan, my calendar link is below and you can schedule a phone or zoom appointment at any time.