2021: A Social Security First

You’ve probably heard it in the news. Social Security is doomed. The chickens are coming home to roost and the politicians are asleep at the wheel. The financial blogs say so, the financial media pundits say so, and the speakers at those dinner seminars have been sounding the warnings for decades. Everyone is scared the trust fund will run out of money, and suddenly, Social Security will go away.

We’ve been reading about this for a long time. Economists have sounded the alarm many times over the years about the imminent insolvency of Social Security if fixes aren’t put into place to shore up the deficiencies.

If you are stuck in this train of thought – you would be very wrong – but, you would be in good company. Let me explain. Social Security will indeed see a first in 2021. It is the first year it will outlay more in retirement benefits to folks than it brings in from the payroll taxes from those who are employed. Of course, it was not unexpected. We saw it coming miles away.

Contrary to popular opinion, Social Security will never go bankrupt as long as people work and pay taxes. The real problem is not enough money is flowing back into the trust fund, causing the shortfall and leading to a potential reduction in benefits. Most estimates say that in a worse case scenario, if benefit reductions were shared equally among all recipients, then all social security beneficiaries would receive just under 75% of their expected benefits.

According to the fool.com, 2020 is the year Social Security should break even, but at some point during the year, it will start running in the red. That means Social Security has been running a surplus until this year. This means that up until 2020, Social Security has been collecting MORE in payroll taxes than it has divvied out in benefits. This is a far cry from the death knell of the plan foretold by so many.

Time for Some Truth and Good News

Make no mistake. If we expect Social Security to perform as designed, it needs some help. But, the truth is the program is not broke and won’t go broke. The worst-case scenario for the foreseeable future is reduced benefits if no changes to the system happen at all. But how likely is the “no change” scenario?

Even with all the bad news about Social Security, Congress has the power to fix it for good. That is the most significant sticking point in this whole mess. Republicans and Democrats don’t show any sign of a willingness to come to the table and talk it out. I guess this makes it the same as almost every issue these days.

Given the growing divisiveness, it has looked for many years that it would take something drastic to come about and force the issue. Congress has kicked the can down the road again and again. And, the Coronavirus may have brought us to the end of the road.

Coronavirus and Social Security

More doomsters joined in the chorus of using the pandemic as convincing evidence of the demise of Social Security. While it’s true that fewer people working means a drop in payroll taxes to pay benefits, it also heightens pressure on Congress to act. This will be a good thing… eventually.

Pointing fingers of blame at high-earners or baby-boomers for the funding shortfall of Social Security proves no one yet has the right answer to advance an agenda to address this elephant-in-the-room scenario we find ourselves dealing with every election cycle.

We’ve talked about this issue with clients over the years and I say again that I think there are three things that will ultimately be done to improve the solvency of this critical program:

  1. It is likely that the full retirement age – the age at which people are entitled to their full benefits – will have to be increased for the younger parts of today’s work force. If you live to 100, you probably don’t want to retire at 67 anyway.
  2. Means testing. I can picture a world where those who have large incomes, without social security, have their social security benefits either reduced (or even eliminated) based on the size of their incomes. Means testing already exists in one way – social security recipients pay more tax on their social security benefits if they have other sources of income. How hard would it be to make the tax on social security 100% if your income from other sources was over XYZ threshold?
  3. Increased payroll taxes. This is actually already in the Biden plan. Biden is suggesting that additional payroll taxes are collected on incomes that are higher than $400,000. It won’t end up being $400,000, but that’s called leadership. Biden sees the problem and has opened the discussion with a dollar figure. He will be tarred and feathered for raising taxes… but the problem is a real one and must be addressed. Leadership addresses hard problems.

It will eventually be resolved (one way or another). The path from recognizing that the problem exists to solving the problem begins with a dialogue. If the author of every idea is summarily dismissed or flamed, which I expect, it will be a long hard road. But, it will still get resolved.

When it does get settled, it will have to involve either benefit reductions or higher taxes. The presumption is that it will involve a combination of the two. The lack of resolution is not due to a lack of solutions. It is due to a lack of conversation. There are solutions, but in a hyper-partisan world, why stick your neck out when you can kick the can down the road?

Of course, when it is eventually solved by a combination of benefit reductions and raising taxes, people will wonder why it took so damn long.

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