A common question I’m asked in a financial planning engagement is this: Glenn, should I plan on receiving Social Security? Will it even be there for me? I’ll say yes – plan on it. Social Security is the third rail of politics, and it is my belief that it will always be there in some form or another. For those of you who’ve never lived in a city with a subway, the third rail is an electrified rail that runs along the tracks. There is a foot from the rail car that rides along the third rail, thus powering the car with electricity. Pretty much instant electrocution if you touch it.
Throughout its history Congress has bought itself votes by increasing the benefit, but they haven’t always raised revenue, i.e. taxes, in a commensurate fashion. There is certainly a history of raised payroll tax rates, and as I’ve noted previously, the NRA (normal retirement age) has been raised. What’s being talked about now? A few things:
Raising NRA again
Current NRA is between 66 and 67 as the age rise is being phased in. 65 really is the new 55. People are living lots longer. Another rise to age 70 may make sense.
Raise payroll taxes again
Not likely to get a Congressman re-elected.
Add a means test
This changes the program dramatically from social insurance to a welfare benefit. A formula determines whether I qualify for any benefit, even though I’ve paid into the system all my working life. Social Security becomes another redistribution effort, in that Congress takes from those who’ve earned (air quotes) too much and gives it to those at the lower end of the scale.
Currently (2020) the 6.2% Social Security tax is levied against wages and business income up to $137,700 per person. Congress would collect a lot more money if they raised that limit up.
There is a precedent for this – Chile has privatized its social insurance, and with considerable success. People have a choice of investment accounts, which include government bonds, into which they can allocate their funds. This puts the onus on providing for retirement squarely on the taxpayer.
A Valuable Benefit
Wherever the program ends up is anyone’s guess. But is it a very valuable benefit in retirement. Consider this: if I retire at age 67 with a benefit of $2000/month, and expect to live to age 90, at 6% the present value of this stream of income is nearly $300,000. This means that at age 67, if I invested a lump sum of $300,000 at 6%, and drew it down by $2000/month, the money would last to my age 90. What if I live till 95? Then the present value becomes $325,000. Any way you look at it, this is a considerable benefit.
Let’s do one more calculation, though. Say I came out of college at age 22 and earned a steady $60,000 for the rest of my working life, to age 67. That’s 45 years. I would have deferred $3720 each year, which my employer would have matched. That number is 6.2% of earnings, which is the Social Security tax rate on wages up to $137,700 (2020). The 1.45% Medicare tax is in addition to this. What if instead I had invested both my half and my employer’s half in my own brokerage account, and earned a steady 6% rate of return? I would have accumulated a little more than $1.5 million. Now re-read the previous paragraph. There’s a lot to be said for taking a close look at Chile’s example.