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.
So the stock market would explode and increase. Or more likely it would crash and make 2008 or 1932 look like a picnic.
Imagine some time a few years from now when 20 million Baby Boomers are actually retired and who each receive Social Security benefits. Let’s say the average per person is $25,000 (which is the approximate amount either my wife or I would get in a few years).
The Social Security Administration said in a 2014 report that back in 2012, for people aged 65 or older with a household income of $64,000 or more, 45% of their income came from their Social Security benefit. That also means 55% came from their retirement savings.
So let’s assume these 20 million Baby Boomers withdraw $20,000 a year from their retirement accounts. That means $400 billion that today is sitting in retirement plan accounts will be withdrawn each and every year for 19 years based on average life expectancy.
Now let’s stop sending them their Social Security checks.
Now 20 million times $25,000 is $500 billion. That is half a Trillion dollars each year that now has to come from withdrawals from retirement savings. From the stock market, from the bond market, from bank savings accounts.
So in addition to $400 billion being taken out each year, now the cash flow out of retirement accounts (and hence withdrawals from the stock and bond markets) becomes $900 billion. This in not a one time, one year long event like we saw in 2008 but an annual event lasting almost 2 full decades. Or maybe 3 to 4 decades for as soon as one Baby Boomers passes away from old age, another one would retire and replace him or her. Remember the Baby Boomer births were spread out over 19 years. And the American Academy of Actuaries in 2014 stated that the probably of a man living to age 85 was 40% which increased to 53% for a woman.
And by the way, where is the money going to come from to pay for all those bonds that upon maturing were cashed out instead of rolled over into new bond purchases? Oops, looks like either the national debt is going to explode upwards (assuming someone will keep buying our debt) or income taxes will skyrocket upwards. So we either have to increase interest rates or increase taxes. But increased interest rates means the federal govt spends more to pay those new bond coupons. Which means more debt or more taxes. Once again, instead of solving a problem it appears to just kick it down the road to morph into a bigger problem.
So much for increasing cash flow by ending FICA taxes.
Let’s for a moment assume somehow the FICA tax ends and all the young people find work and invest every penny of what would have been taken out for FICA taxes. There still would not be enough young workers contributing a few hundred dollars a month to offset 10, 20, or 30 million retired Baby Boomers taking out $3,000 to $4,000 a month for living expenses.
And let’s remember that those young workers can only put in a limited amount each month (as they earn it) whereas a retired person can withdraw a full year’s worth of income or more in a day or two. When, not if, the stock market started going down quickly, millions of retirees would pull money out of the stock market as quickly as they could. Could I please talk to your own son or daughter on the phone to ask them to trust in the stock market, to believe it will come back in time so that I need not panic and withdrawal all my stock mutual funds. Will you ask your grown children to personally save my retirement accounts. I promise to ask mine (as soon as they stop laughing).
Would you personally invest in a market that had a flat or downward trend for the next decade? If you were going to retire before that decade ended, would that change your investment decisions? And if you answer FIA or IUL, what happens when 90% of the people investing choose those options over “buy and hold”?
So can we say economic collapse?
Can we say that the costs of letting Social Security end would cost more than whatever fix would be necessary to keep it going?
Can we stop the fear mongering? I know we need to get more people saving and investing more, but fear may not the best answer.
Can we stop talking about the end of Social Security and start talking about realistic ways to fix the problems while doing the least amount of additional damage?