Every month, Social Security creeps a little bit closer to insolvency. There’s no realistic plan to save it right now. Today we ask, rather than saving Social Security, can we instead replace its benefits?
From Peter Reagan at Birch Gold Group
The Social Security benefit program that hard-working Americans have been paying into for decades has been behind the 8-ball for quite some time.
Today, 2022, we’re drawing ever closer to the end of the road. If nothing meaningful is done to fix the program, and soon, retirees will likely find their monthly payments cut by 25%.
The Social Security Trust Administrators explained the dire outlook for the program in their most recent bulletin:
Currently, the Social Security Board of Trustees projects the program cost to rise by 2035 so that taxes will be enough to pay for only 75% of scheduled benefits. This increase in cost results from population aging, not because we are living longer, but because birth rates dropped from three to two children per woman. Importantly, this shortfall is basically stable after 2035; adjustments to taxes or benefits that offset the effects of the lower birth rate may restore solvency for the Social Security program on a sustainable basis for the foreseeable future.
On one hand, the statement is confusing because, despite what the SSA claims, longer life expectancy is in fact one of the reasons the program will cost more according to analysts as well as common sense. And yes, lower birth rates (without offsetting immigration) means fewer worker paychecks over the years, meaning fewer taxpayers to pay the bill.
Yes, “adjustments to taxes or benefits” are definitely required “restore solvency.” Alas, the Social Security Trust Administrators fail to provide suggestions or actionable information.
Since an astonishing 1 in every 6 Americans collect Social Security benefits, 80% of them elderly, simply stopping the program altogether isn’t a realistic option. Even if it was, imagine the howls from every corner of the nation! I paid nearly $100,000 in Social Security payroll taxes, and my employers paid another $100,000 – and all I got was robbed!
We grudgingly accept those mandatory payroll taxes with the hope that money will be returned to us, on some future day. Any attempt to declare our Social Security contributions gone for good? There would be big trouble.
That leaves two solutions: Cutting benefits, or raising taxes.
With inflation still running hot, cutting benefit payments would likely push some 16 million elderly Americans below the poverty line.
Raising taxes? Right now, we’d be looking at tax hikes to the tune of nearly 1% of national GDP! That will make exactly no one happy, and it’s not a political position likely to lead to re-election.
So lawmakers and bureaucrats are struggling to come up with a solution that won’t impoverish hard-working Americans saving for retirement or retirees who rely on those monthly checks to survive.
Unfortunately, we’ve yet to see any meaningful ideas out of D.C….
So-called Social Security solutions raise more questions than they answer
Congressional candidate Blake Masters recently suggested:
Maybe we should privatize Social Security. Right? Private retirement accounts, get the government out of it.
Here’s the thing: Fully 2/3 of American workers already have access to private retirement accounts. These retirement plans, whether they’re 401(k) or IRA or 403(b) accounts, are what’s called “defined contribution” plans.
Social Security, on the other hand, is a “defined benefit” plan.
What’s the difference? Defined contribution plans don’t guarantee anything! It doesn’t take more than a few bad decisions to slash your retirement account’s balance in half.
Defined benefit plans, in contrast, promise to pay you back. (Whether or not that promise is kept is another matter.)
Masters eventually walked this idea back after some pushback, saying: “We can’t change the system. We can’t pull the rug out from seniors.”
This article won’t dive into the typical blame games that accompany such ideas, like the idea that privatizing Social Security automatically means tax breaks for the wealthy. But the idea itself does come with risk of “pulling the rug out,” as Masters said.
But other ideas suggested by politicians on both sides of the aisle, boil down to one or more of the following:
- Raising the payroll tax rate
- Increasing the Social Security taxable wage limit (essentially, penalizing top earners)
- Raising the full retirement age from 65-67 to 70
- Reducing the annual cost-of-living adjustments (COLA) which already significantly trail inflation
- Cutting benefits across the board
With rampant inflation that isn’t likely to cool off for a while, the thought of raising taxes or increasing the taxable income base aren’t really going to sit well.
Reducing the cost of living adjustments isn’t feasible either, since it’s supposed to keep up with inflation.
Raising the full retirement age might help a little. But what about those people who are saving for retirement right now and planning on retiring at 67? “Sorry, Grandpa, we know you’ve worked hard all your life. Just keep at it a few more years!”
Politicians like Scott Baugh don’t appear to add much to the conversation, with anodyne statements like:
Congress must ‘reform entitlements’ like Social Security and Medicare to tackle unfunded liabilities and balance the budget over the long term.
That’s a good diagnosis of the problem – without any plan to tackle it.
Democrats like Sen. Mazie Hirono of Hawaii and Rep. Ted Deutch of Florida proposed to erase the upper income limit on payroll taxes:
Currently, Social Security is funded through payroll taxes of 6.2% paid by both workers and their employers. But those taxes only apply to income up to $147,000 as of 2022.
Hirono and Deutch’s bill calls for phasing out the cap over the next seven years. For contributions above the cap, it would provide additional benefits.
Wait a minute – for “contributions above the cap, it would provide additional benefits”? How are they going to make up the shortfall by providing “additional benefits”? Maybe they’re just thinking of sending high-earners an I paid for your retirement t-shirt…?
Other proposals from the left-hand side of the aisle target wealthy taxpayers: “applying the payroll tax on all income above $250,000 a year, including capital gains, while also raising taxes on net investment income and certain business income.”
Ouch! The real problem with taxes isn’t so much that our government has all the fiscal discipline of a Cancun-bound college student going on spring break with Daddy’s credit card. It’s that taxation discourages the taxed activity.
Raising payroll taxes on high-earners all too often drives high-earners to emigrate to a friendlier nation (or beg their employers for pay cuts).
Raising capital gains taxes discourages investing.
Raising taxes on businesses discourages entrepreneurs from starting or growing their businesses.
Regardless of whose “solution” wins out, one thing is very clear…
The entire Social Security program is in trouble, right now. Its future is extremely unlikely to look like its past – and almost certainly for the worst.
So how can we turn our “defined contribution” retirement plans into “defined benefit” plans? How can we guarantee that the money we save for retirement will still be there when we need it?
Turning your defined contributions into defined benefits
Honestly, the latest proposals from both sides of the aisle to solve the imminent Social Security dilemma are classic government hand-wringing. Eventually they’ll get around to kicking the can down the road a little further somehow. Maybe they’ll meddle with inflation measurements again to save money on COLAs.
Maybe they’ll turn to the Federal Reserve to fill the budget gap by printing even more money – which makes more money, but not more wealth.
Maybe they’ll dust off Franklin D. Roosevelt’s 94% federal income tax on the top 1% earners, sending the wealthiest Americans packing for another country.
Regardless, if it’s one thing we can count on from the federal government, it’s to do the wrong thing, too late. They’ll go to shut the barn door and just stand there, confused, staring at a pile of ashes where the barn used to be, wondering where the horses got to.
So it’s a good idea to “insure” your retirement savings by doing your best to turn your defined contribution plan into a defined benefit plan. That means investing in assets whose value is well-established, with a historical track record of preserving purchasing power. Ideally, those assets would diversify your savings away from stock market volatility, away from bond market pain, away from the corrosive effects of inflation.
Physical gold and silver could be the right solution for you. The best thing about a precious metals IRA is the security of knowing that, no matter what the financial markets do, an ounce of gold is always an ounce of gold.
Instead of relying on Social Security’s “defined benefits” which are increasingly unlikely to materialize, define your own benefits.
Peter Reagan is a financial market strategist at Birch Gold Group. As the Precious Metal IRA Specialists, Birch Gold helps Americans protect their retirement savings with physical gold and silver. Based in the Los Angeles area, the company has been in business since 2003. It has an A+ Rating with the BBB and hundreds of satisfied customer reviews.
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