What’s Behind the Gold Hype?
Despite the reams of retirement planning advice out there, there will always be some people, many through no fault of their own, who are unable to save enough money to retire comfortably. That was the impetus behind the creation of the Social Security System, to provide a backstop so that those whose retirement savings were insufficient would have an additional source of funds available to them in retirement so that they would not become indigent.
Unfortunately, over the years more and more people have begun to see Social Security less as a last ditch effort to keep retirees out of poverty and more of a stable and substantial benefit upon which they plan to rely and should be able to rely. By doing so, Social Security has become a central part of many people’s retirement planning.
The politicians in charge of the Social Security System haven’t done a good job of keeping the system going, as it already faced a funding crisis that resulted in numerous changes having to be made throughout the 1970s and 1980s to keep the system solvent. Now the system is facing another funding crisis, as the Social Security trust fund is once again slated to run out of money, this time by 2035. At that point, beneficiaries can expect to get only about 80% of their expected benefits.
With Social Security inching closer and closer to the date of the trust fund’s exhaustion, no one in Washington seems to be taking notice. Something needs to be done, but what will end up happening? Will Congress fix the system once and for all, will it keep making short-term patches, or will it just let the system collapse?
What Would a Fix Require? – Political Will
The first thing that’s needed to fix Social Security is the political will to fix it. That will be tough to achieve. Social Security has long been known as the third rail of American politics – touch it and your career is dead.
That’s why no one in Washington is working on a solution yet, because they all are too concerned about their careers to risk the political suicide that a fix to the system would require. Getting the political will to fix Social Security would require members of both parties to come together, agree that they’ll suffer the consequences that could mean an end to their careers, and come up with a fix.
But with every freshman Congressman aspiring to leadership, and everyone on the leadership team aspiring to become Speaker of the House, there aren’t enough real leaders willing to sacrifice their careers to come to an agreement. That doesn’t bode well for the future of the system.
In all likelihood fixing the Social Security system would require raising payroll taxes. When Social Security first started, the payroll tax was 1% each on both employers and employees. By 1950 it was 1.5%, by 1960 it was 3%, and by 1980 it was 5.08%. Now it is 6.2% which, combined with the 1.45% rate for the Medicare payroll tax results in a combined 7.65% payroll tax for both employees and employers.
Money hasn’t been an issue in the past, but it is now that the combination of payroll tax contributions and interest on the trust fund is no longer sufficient to pay out Social Security benefits. That may require payroll tax increases that won’t be very popular.
All of this is a result of how the Social Security trust fund was treated. Because payroll taxes were greater than benefits paid, money accrued. But rather than being held in trust, that money was used to purchase special non-marketable Treasury securities – IOUs. The money was then spent on other things and has long since disappeared. The interest on the IOUs helped pay for Social Security benefits, but now the government has to dip into the trust fund and purchase and liquidate those IOUs in order to pay Social Security benefits.
The trust fund is now expected to run out of assets by 2035, at which point payroll taxes will only be able to pay about 80% of expected benefits. So without more money coming into the system, retirees are going to face a benefits crunch. In order to keep Social Security solvent, a payroll tax increase of 23% (nearly 3 percentage points) would be necessary to keep the system funded through 2092.
Of course, that’s only if the tax is increased today. The longer Congress waits, the higher the payroll tax will have to increase. And with no one wanting to take more money out of Americans’ pocketbooks, it might be a while before payroll taxes are increased.
Raising Retirement Age
Congress could also decide to raise the Social Security retirement age. Right now the full retirement age is 66 for those born between 1943 and 1954, rising to 67 for those born after 1960. Congress could try to buy some time by raising that to 68, 69, or 70. That might save some money, but that would anger retirees who vote in large numbers and surely wouldn’t hesitate to throw out of office anyone who messed with their benefits.
Currently the maximum amount of income subject to Social Security payroll taxes in a single year is $132,900. That’s because high earners are expected not to have to rely on Social Security income. But that also cuts down on the amount of income that Social Security can take in. Raising that income limit to $250,000 or $500,000 or more, while still not raising benefits for high earners, could result in a short-term financial benefit to the system. But would it be feasible politically?
Lower Cost-of-Living Adjustments (COLA)
Given the low figures for consumer price inflation, Social Security recipients already face very small COLA adjustments. There’s probably not much room for the system to adjust any further without dropping down to zero.
What no politician wants to do is cut benefits to existing retirees or those nearing retirement. Part of the problem is that when the system was flush with money, Congress kept expanding benefits to more and more people. It was a naked attempt at buying votes, but it was successful.
Now that those benefits have become entrenched and expected, it’s politically unfeasible to attempt to reduce them. Yet if nothing is done to shore up the system’s financial situation, a cut will be the default scenario in 2035. That may end up being what happens, as no one is willing to expend political capital to actually fix the system. That’s all the more reason for Americans to take matters into their own hands, realize that they are solely responsible for their own retirement, and start saving and investing wisely to ensure a safe and comfortable retirement.