By now it’s no secret that Social Security is in dire straits. According to the latest Social Security Trustees Report, Social Security taxes have long been unable to pay for Social Security benefits. Only because of interest gained on Social Security’s trust fund has the system been able to keep paying benefits without dipping into the trust fund. Now that has changed too, so that Social Security tax receipts and interest from the trust fund are no longer sufficient to cover Social Security benefits.
The entire $2.9 trillion that is stored up in the trust fund is expected to be drawn down over the next 15 years, with the trust fund falling to zero in 2034. At that point Social Security taxes will only be enough to cover less than 80% of expected Social Security outlays. Unless Congress does something to increase Social Security taxes or to cut Social Security benefits, retirees in a few short years can expect to receive less than 80% of the Social Security benefits they expected. For those who expected to rely primarily on Social Security in retirement, that could be catastrophic.
The Democratic Plan to Save Social Security
Democrats in Congress have once again introduced legislation to save Social Security, the Social Security 2100 Act. The legislation has been introduced in previous years too, but with the Democratic takeover of Congress it stands a greater change of at least getting a hearing even if it doesn’t pass. The legislation makes a number of changes to Social Security that are intended both to increase Social Security revenues while simultaneously increasing benefits to many recipients.
First, the legislation increases Social Security payroll taxes from the current 12.4% to 14.8% by 2043. That is intended to bring in more revenue to the system.
Second, high income earners will now have to pay more in Social Security taxes. For 2019 only the first $132,900 in income is subject to Social Security taxation. Any income above that level is not subject to Social Security taxes. The Social Security 2100 Act would mandate that any income above $400,000 would once again be subject to Social Security taxes, again bringing more money into the system.
Third, the bill would exempt Social Security receipts from taxation for those bringing in under $50,000 per year ($100,000 if married filing jointly) in retirement.
Finally, the bill would increase benefits for retirees and ensure that cost of living increases are calculated differently to ensure increases that actually keep pace with the rise in the cost of living.
As with any plan, there are positives and negatives. By raising Social Security taxes, the bill will make it more expensive to hire workers and will lead to a suppression of wages. And it will have the same effect on higher wage-earners, leading to a reduction in their salaries as well.
While the increase in benefits to lower-income Social Security recipients would undoubtedly be welcome, one has to wonder whether the increase in revenue will be sufficient to cover that increase in cost. Social Security financial projections have often been known to be overly optimistic. When Social Security was last overhauled in 1983 the system was projected to remain in sound financial condition for the next 75 years. Now we know that that fix will last 51 years at best. While the Social Security 2100 Act is intended to keep Social Security solvent through the end of the century, how do we know that it isn’t just kicking the can down the road, with Social Security needing yet another increase of funding 40 or 50 years from now?
Social Security Is Supposed to Be a Backstop, Not a Primary Source of Funds
What attempts to fix Social Security fail to take into account is that Social Security was intended to be a safety net, a backstop for when everything else failed, and not the primary source of anyone’s income in retirement. But over the years more and more people began to take Social Security benefits for granted, assuming that the system would pay them handsomely throughout retirement. Cases such as Ida May Fuller, the first Social Security recipient, who paid $24.75 in Social Security taxes but received $22,888.92 in benefits over 35 years, undoubtedly did much to build up those assumptions.
The reality is that the only person you can depend on for retirement is yourself. Pensions have all but disappeared from the workplace and those that still exist are severely underfunded, Social Security is on incredibly rocky ground, and hoping to rely on friends or family is not viable. Unless you make a serious effort to save and invest for retirement, you will have a very rough time once you stop working.
That means taking advantage of every saving and sound investment opportunity you can. Take advantage of workplace 401(k) plans, especially if they offer matching contributions. Open IRAs, brokerage accounts, anything you can to save money for the future. And above all make sure that your assets are protected by investing a portion of them in gold.
While stock markets can generate great returns for investors in good years, they can erase those gains in a matter of months. Gold, on the other hand, keeps its value year after year. It has protected investment portfolios for centuries, and will continue to do so for centuries to come. And with modern investment vehicles such as gold IRAs, investors can enjoy the same tax advantages as their traditional IRA while still benefiting from the protection that gold offers.
Regardless of how you choose to structure or diversify your portfolio, it is crucial that you have a portfolio to work with. There are too many horror stories of retirees who expected to rely on Social Security but who realized far too late that their plans were financially untenable. Don’t let that happen to you. Start saving early and save as much as you can to ensure that you have a sound financial future and a comfortable retirement.