What if American citizens’ pessimistic concerns about Social Security and its viability for the future turned out to be accurate?
What if tomorrow Congress got together and came to a fateful compromise? Rather than trying to increase taxes or allow private investment accounts with the currently collected FICA taxes, they dissolved the program.
Future retirees would only receive a payment based on what they had paid in so far. What would happen to your retirement planning process and our American economy?
It is a drastic scenario but one believed possible by a high percentage of future recipients, and a majority of millennials. As recently as last year, 81 percent of this demographic stated they were concerned Social Security would not be there in the future, according to a study by Transamerica’s Center for Retirement Studies.
Perhaps ironically that same study concluded that generation was taking steps to save far more proactively than prior generations. They are going to need to, for sure.
Retirement planning – with no assumed income from any source or accumulated savings – is tough for the average household, even those closer to retirement. Consider a household without work, rental income or pensions but $250,000 saved. The family would have just $10,000 a year of income assuming the 4 percent rule for how much they would withdraw in the first year of retirement.
And considering the average household doesn’t have near that figure saved, there would be millions of families with no real hope of stepping away from work.
On the other hand, under this hypothetical scenario practically every worker in America would see a substantial increase in cash flow overnight. If there is no future benefit to receive, there would be no FICA tax to pay on either the employee or employer side. This represents 6.2 percent of income up to $117,000 or a maximum of $7,254 per year, per person and also up to that amount of savings for the employer.
Not everyone earns $117,000, but what would people do with an instant several hundred dollars a month after tax? Some would spend it, leaving them nothing for their old age. But others would pay down debt and save the rest to recreate the safety net Social Security provides.
And what would employers do? Would they forward on that money to employees or keep it as profit causing the stock market to explode, or reinvest it for growth, possibly creating more jobs?
No one knows what the future holds, or what possible adjustments to the system future leaders will make. A more gradual shift to a later retirement date seems likely, just as was done in 1983. When that amendment was passed, it didn’t affect a single person’s benefit for 17 years, and increased the retirement age over a 22- year period.
Simply repeating this step would lead to Social Security’s viability for decades to come.
Keep in mind people’s natural inclination to “not believe it until I see it” as well. In a survey done in 1979, only 32 percent of workers believed Social Security would be able to fund its future benefits, according to the Social Security Bulletin.
That’s 36 years ago and counting. Those same survey takers are, thankfully, today’s recipients.
Brian Kuhn is a certified financial planner at PSG Clarity, a division of Planning Solutions Group, who lives in Odenton with his wife and two daughters. You can reach him at 301-543-6035 or www.psgclarity.com. He offers securities through Triad Advisors, Member FINRA/SIPC. Advisory Services offered through Planning Solutions Group, LLC. Planning Solutions Group, LLC is not affiliated with Triad Advisors. PSG Clarity is a division of Planning Solutions Group, LLC.