The Smart Take:
Social Security’s future solvency is a regular discussion point when considering your retirement planning. Simply put: can you rely on receiving what is shown on your Social Security statement? Tune in to hear the latest nuggets from the 2019 Social Security Trustee’s report – he read it so you don’t have to – and what Kevin believes to be the most likely reforms.
Prefer to read? See below for the transcript of the show.
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Introduction: 00:03 Welcome to Retire Smarter with Kevin Kroskey. Find answers to your toughest questions and get educated about the financial world. It’s time to Retire Smarter.
Walter Storholt: 00:03 A few words that may have never been uttered before. To start off today’s podcast, right before we began recording I said, Oh, Social Security, this will be fun. I have no idea why I came up with those comments, but you’re going to try and accomplish that difficult task today, right, Kevin?
Kevin Kroskey: 00:31 Yeah. Thanks for setting me up, Walter. I’ll go to do my best. All right,
Walter Storholt: 00:36 Well we’ve got a fun show on the way for you. Welcome, by the way, to Retire Smarter. Walter Storholt here alongside Kevin Kroskey. He’s the man you’re here to hear from the President and Wealth Advisor of True Wealth Design serving you in Northeast Ohio with offices in Akron and Canfield as well, but serving you all across the country. If you want to check us out online at TrueWealthDesign.Com and don’t forget to subscribe to the podcast on your favorite apps. We’re all over the place, Stitcher, Spotify, Google Podcasts, Apple podcasts, all of those good ones as well. If you find an app that we’re not on that you’d like to listen to, let us know. We’ll make sure that it gets submitted to those different providers. So, yeah, at the beginning of our session today, before we hit the record button, Kevin said, yeah, on this podcast, let’s talk about Social Security and the trustees. I’m reading my notes here, Kevin and the trustees’ funding report. I read it. Not a lot of people probably have, so I want to talk about what I learned from it. So yeah,
Kevin Kroskey: 01:29 I save everybody the torture, but I’ll give them what I think that they need to know. How’s that sound?
Walter Storholt: 01:35 There you go. Why would you take time out to read a Social Security trustees funding report? What can be gleaned from that?
Kevin Kroskey: 01:43 Well, you know, it’s a common question. If I back up for a moment, there used to be this figurative model of a three-legged stool for retirement, and one of the legs was a pension from the company that you spent your whole career at. Another leg was from Social Security in the third leg was from your savings and investments and over time in the pension, a leg of the stool for most people is going away or being cut off to a certain extent just because companies now for about, you know, 20, 30 years have been getting out of the pension business and just being more 401k or defined contribution focused. So more the way it is come on to all of us to prepare for our own retirement. And so security is still important. You know, it’s a good chunk of change for most people you paid into it for, for all these, you know, 30, 40 plus years that you’re working and then you get into retirement or at least on the doorstep of it and you think, well I need income.
Kevin Kroskey: 02:41 So people often just, but just turn it on and they don’t really think about, you know, planning for it. Now, we’ve talked about this and you know, prior episode and, and that that’s really changing in part to people like me that are informed on how the system works and on how to integrate it and somebody’s overall retirement plan and retirement distribution. But there’s still a lot of people that, you know, just kind of take the de facto approach of, okay, I retired, I’m 62 or better, I’m going to go ahead and start it. And I’m a big believer in not doing anything de facto and not thinking about it. We want to help people Retire Smarter. That’s the whole objective here. So when you start looking at and you start talking to somebody about, Hey, maybe it does make sense to defer the benefit and we really won’t get into that conversation today, but just presuppose that it does.
Kevin Kroskey: 03:28 So one of the concerns that come up as well, do I really want to do that? I mean, is it, am I going to get the money out of it? I’ve heard that there are some funding issues down in Washington DC and I don’t know how I feel about that. So I think it’s valid. I think it’s a common concern that a lot of people have. It may be correlated to their political persuasion. I’m not sure. It may be correlated to their age. At least we think of it that way. But I wanted to unpack that a little bit. The Social Security trustees report comes out every year. It’s kind of the, you know, here’s the report card on Social Security. And so we have to include that, that part of the stool into somebody’s retirement plan. So you know, should we include it to the extent that they’re currently promising us benefits and that’s what we’re going to get into today.
Walter Storholt: 04:15 So Social Security, obviously one of the most talked-about things when it comes to retirement planning and its viability into the future kind of is then, you know, subheading one B if you will, whenever the Social Security topic comes up. So yeah, tell us about some of the things that you learned from reading that report and your kind of read on the situation as it is right now.
Kevin Kroskey: 04:34 Sure. So if you look at your statement and you can go out and you can get your statement, Social Security.Gov and you have to log in, you have to answer some questions and hopefully, you can answer them right there. They’re linked to your credit report and a, if you have a common name, say like, you know Bob Jones, then there’s a lot of Bob Jones is that that are out there. And the credit reports we found for more common names often seem to get kind of, crossed up. So sometimes people can answer these questions and sometimes they can’t. But if you can get it online, then you can just go ahead and get online and download the PDF report and it’ll show right on page two of your Social Security report what your projected benefit amount is at different ages.
Kevin Kroskey: 05:16 And then I think it’s in bold. But right below that it says, you know, something to the effect of, you know, the above are estimates only and that the current funding for Social Security is projected to, to run out in like 2035 and so that understandably evokes fear in people saying, well yeah I heard the government, you know, had some issues and this only further proves it but I got to pay into this thing anyway. So what that really means when you start looking into the report is that it’s not like it’s going to be bankrupt in 2035 for years and many people know this, but you know, back in the day, you know, if you go back 50 years, 60 years ago, there was a lot more workers compared to benefit recipients and so a lot more people paying in compared to those that were, you know, receiving and collecting and benefits being paid out to, well that’s changed over time as people are living longer, you know, they’re receiving benefits longer.
Kevin Kroskey: 06:13 You’ve got, you know, the Social Security system has been around for quite some time now. So it’s just kind of, it’s matured. If you will. So whereas you go back to the 1950s and you had about 16 workers for everyone benefit recipient, and when you go out to say about 2035 it’s just a little bit more than two, two people paying in for every one benefit recipient that you have. And so just the demographics have changed a lot. And with the baby boomers continue to retire, then they, you know, it’s continuing to go that route. Well, so in 2011 was the first year that all the money that was collected through payroll taxes, you know, you look on your, your pay stub and you see, you know, these FICA people and you know, they’re pulling out 6.2% of your pay and putting into Social Security and then you’re paying another 1.45% for Medicare.
Kevin Kroskey: 07:04 But you’re only paying the 6.2% I say only, you know, on a certain amount of your wages, the ballpark at, it’s about $130,000 this year. So if you are fortunate to say, make you know, $200,000 you pay security tax, 6.2% on the first $130ish, and then you only paying Medicare tax the 1.45% on amounts over that. And so, in 2011 because of again, the demographic changes and amount of benefit recipients in relation to the workers, that was the first year that Social Security had a deficiency balance if you will. So there was a surplus that was built up in there and in the trust fund. And they also have some basically government bonds that are in there that are earning interest and they’re spending down those reserves. And that started in 2011 and it’s going to continue on a projected basis through 2035 at which point in time everything that is collected is going to turn around and be paid right back out.
Kevin Kroskey: 08:02 And at that point in time, that’s when we’re going to have this deficiency in the system. So now, like it’s going to be completely bankrupt, but it’s going to be deficient. And when it just has this pay as you go system money is collected in about 75% is the current estimate about what’s going to be able to be funded in 2035 when all the surplus is drawn down. So it’s not like the system’s going to be going away. Reforms are going to have to be made and Washington is not known for getting a lot done these days. But sooner or later the bell is going to have to ring and things are going to get done. So all that I wanted to talk about was a few of the, what I think are the likely fixes. I’m going to put on this prognosticator hat, look into the crystal ball ahead of me and I’m going to try to predict not only the future but the future of what our congressional and Senate leaders are going to do.
Kevin Kroskey: 08:55 It sounds a little risky when I say it out loud. I’ll turn by the time when I do it anyway.
Kevin Kroskey: 08:58 We like risky here on the podcast though. I think that’s, that’s what makes this, I said it was going to be a fun podcast about Social Security. So, I think the predictions are what get us there.
Kevin Kroskey: 09:05 I’m setting myself up for failure here. So I’m okay with that though. So I think in my opinion, and this has to do in terms of kind of the projected gap and what the likely fixes are going to be kind of considering, you know, the dollar amount of the fixes and just the feasibility of things. And I’d be stupid if I didn’t think about the electability of people because once they get in Washington, their primary objective is to stay in Washington the cynic in me would say, so you have this gap.
Kevin Kroskey: 09:32 We had tax reform in 2017 in 2017 they introduced something called “Chained CPI” into the tax code. And basically every year that there’s inflation, the tax rates increase by inflation. Well, at least they did until Chained CPI came into effect. And so now what happens is there’s this Chained CPI and without getting into the details, if you look at just actual CPI or consumer price index, again, just the proxy for inflation, it’s how the government measures inflation. Chained CPI, If you look back over say the last three or four decades, it’s about 0.25% less than what CPI is. And so, said another way in, in numerical terms, if inflation or CPI is 2.5% Chained CPI is probably going to be about 2.25% so it doesn’t sound like a big difference. And you know, if you look at it over a 30-year period, it will reduce the value of a dollar by about maybe like 7% or 8%.
Kevin Kroskey: 10:31 So you’re going to have kind of smaller inflation increases. But in aggregate that’s going to fill up about 20% of this deficiency once we get into 2035 and this is something that historically both Republicans and Democrats have agreed to. And so I think it’s just a matter of, you know, when this does come together at some point in time, it’s already been agreed to in different formats and different bills and then just kind of different leaders talking about it over the years. So it seems like it’s common ground, you know, I don’t think most people are going to get up in arms about a 0.25% change to their cost of living adjustment because most people’s minds don’t work where they compound that over time and really just do the math. So that fills about 20% of the gap pursue and it’s already into the existing tax code.
Kevin Kroskey: 11:18 So there we go. The other thing is I mentioned you’re only paying payroll taxes on the first $130,000 so security is a social insurance program. So disproportionally lower-income people benefit from it more than higher-income people. At least that’s the theory behind the system. The cynic in me says, well there’s higher-income people live longer and have, you know, the wealth that they have correlated to better food and better healthcare and what have you. And that correlates with living longer. So they actually get benefits longer, but, but that’s a conversation for another day. And so, if they just uncapped the $130,000 that would really fill up the of the gaps. So two changes. You disproportionately, affect a group of younger higher-income people that are still paying into the system and then you do this Chained CPI and it really closes the entirety of that gap.
Kevin Kroskey: 12:05 There could be other changes, but I think those are two of the most plausible. There’s nothing else that even comes close unless you’re going to get into like some steep benefit reductions of what that uncapping of the payroll tax can do. So, it’s most likely going to affect disproportionally younger, higher-income people. And I think everybody’s going to share in kind of the less noticeable pain of moving to a Chained CPI for the cost of lighting and adjustment. And if you do those two changes in those two changes alone, it’s like 95% of the gap that it will fill. Even if they pushed back the retirement age of full retirement age, a little bit beyond say 67 that will help even further and probably plausible just given how people are living these days and how they’re living longer.
Walter Storholt: 12:51 So it’s good to know. It sounds like that as part of that three-legged stool, Social Security is not going to lose its leg anytime soon. Even though we’re encouraging people to be more independent, rely less on Social Security for their ultimate retirement plans, we can still rely on that stool, that leg is going to be there as part of that stool. Right?
Kevin Kroskey: 13:14 I completely agree. You know, if we have somebody in certain plans, maybe we have a client that is more sensitive to that assumption and we just can go ahead and create, you know, an alternate scenarios showing well you know, Hey if Social Security was maybe reduced by 25% which again is kind of what the math would show if no reforms are made, but you know, you kind of have plan A and plan B. The other side that I would say, the other important thing I would mention is it kind of depends on your age. So any of the proposals that I’ve seen over the prior years, usually there’s a cutoff line somewhere between age 50 or 55 and if you’re older than that then you’re not going to be affected and these changes are going to be phased in over time. It’s the same thing that happened back in the early eighties that’s when they moved the retirement age from 65 to 70 but it affected people that were born in 1960 and later the age 67 cohort that I mentioned.
Kevin Kroskey: 14:08 And so if they were born, the earliest was 1960 the change happened in 1983 so they were 23 years old when President Reagan signed in the law. That change and they have the entirety of their career to go ahead and plan for that phase in so past is probably prologued there and it’s likely that you would have a similar sort of phase in if there’s some sort of movement and the retirement age or even potentially some sort of benefit reduction, which you know, again, it kind of violates rule number one of Congress and Senate of getting re-elected for a benefit reduction. That’s why I think some of these other things, you know, you get the high-income younger people higher-income small voting block and then the 0.25% on the COLA. You know, there’s a lot of people that they’re not going to understand what that is and so they’re also not probably going to get up in arms about that change.
Walter Storholt: 14:58 Yeah, that’s a really good point. I think Kevin, and glad that you read the funding reports so that we didn’t have to, that’s the moral the story.
Kevin Kroskey: 15:04 We have to have good assumptions going into the plan. So I won’t say that I incredibly enjoyed reading it, but I think it’s part of the job. So you got to do what you got to do.
Walter Storholt: 15:15 That’s right. We can’t love every single piece of our jobs, but the overall benefit is that you know more going into each and every person’s plan. Now having had that information and hopefully, you found this information helpful on today’s podcast as well. I’ll remind you if you are interested in talking to Kevin a little bit more about your particular situation, you can always get in touch by going to TrueWealthDesign.com. The easiest way to do it is to look for the “are we right for you” button and you can schedule a 15-minute call with an experienced financial advisor on the True Wealth team right there from your computer or smartphone. Just go to TrueWealthDesign.Com and click on that. “are we right for you” button or you can give a call to Kevin and the team as well at (855) TWD-PLAN that’s (855) 893-7526. Well Kevin, thanks so much for walking us through that report and giving us some good takeaways from that recent piece of information that came out and we’ll look forward to a fun podcast with you again next time around.
Kevin Kroskey: 16:14 Sounds great, Walter. Take care.
Walter Storholt: 16:16 That’s Kevin Kroskey. I’m Walter Storholt. Thanks so much for joining us. Don’t forget to subscribe to the podcast on your favorite app and give us a review on iTunes on the Apple podcast app as well and shoot us your comments anytime by going to TrueWealthDesign.Com and letting us know what you think of the show or if you’ve got any questions, we’re happy to certainly answer those for you. Thanks for joining us and we’ll talk to you next time. Right-back here on Retire Smarter.
Disclaimer: 16:45 Information provided is for informational purposes only and does not constitute investment tax or legal advice. Information is obtained from sources that are deemed to be reliable, but their accurateness and completeness cannot be guaranteed. All performance references historical and not an indication of future results. Benchmark indices are hypothetical and do not include any investment fees.