What’s to Become of Social Security?

ss-card-300x199This Thursday October 10 is COLA day. No, it’s not a Coca-Cola National Holiday. (Actually May 8 is National Have a Coke day–guess there’s a day for everything). October 10 is the day that the Cost-of Living-Adjustment is announced for the 62+ Million Social Security recipients for 2020.

It is predicted that they will get a modest raise this year, estimated to be 1.6%, lower than the 2.8% raise they got last October. But there were years when Americans just got coal in their stockings and no COLA at all, because the COLA was zero.

The COLA for this decade has been as follows:

2010                       0

2011                       3.6%

2012                       1.7%

2013                       1.5%

2014                       1.7%

2015                       0

2016                       0.3%

2017                       2.0%

2018                       2.8%

2019                       ?

Since the average Social Security recipient receives roughly $1500/month, the raise would equate to $24 or about $300/year.  However, the issue that Social Security recipients (current and future) face is far bigger than what the COLA will be. The issue is whether Social Security will exist in the future (Spoiler alert: it will). And what modifications will need to be made to the program to insure its health.

Just to define terms Social Security is shown on your pay check as FICA. The Federal Insurance Contributions Act (FICA) tax is a United States federal payroll (or employment) tax imposed on both employees and employers to fund Social Security and Medicare—federal programs that provide benefits for retirees, the disabled, and children of deceased workers. FICA tax is a combination of a 6.2% Social Security tax and a 1.45% Medicare tax that the IRS imposes on employee earnings.

When I was younger I figured social security was a tax that gave money to “old people”. I didn’t understand (or care) that my employer matched my contributions. I care a lot more about the match now as a business owner as I know pay twice. What I did know back then was that I was happy when my salary exceeded the ceiling where money was taken out because my paycheck got larger when I passed the ceiling (now $132,900).

Now that I am wiser (a/k/a an “old people”) I appreciate that Social Security can provide a modest safety net for older and disabled Americans. The current max payout at Full Retirement age (currently 66 and edging up to 67 within a few years) is $2861/month, which equates to $34,332 annually. If you qualify for the max, you can increase that to $45,240 annually by waiting to collect at age 70. It’s very hard to live on that money alone, though many Americans are forced too, and most receive far less than the max.

Today’s Millennials have little confidence in the long-term ability of social security to fund future payments. In fact, the majority think it won’t be there years from now when they reach retirement age. And just like me at their age, they spend little time thinking about social security other than being irritated on pay day that a bunch of money was being deducted, and hoping they too can reach the ceiling beyond which Social Security is no longer withheld.

So my advice to Millennials is as follows:

1. Don’t sweat about Social Security—Have confidence that it will be there in some form years from now, even if it is modified, or reduced. Any politician who seeks to eliminate social security will be an ex-politician quickly.

2. However, don’t count on social security to fully fund your retirement. It’s a start at best.

3. Save like hell now since there are few pensions left in corporate America. The good news is that Millennials have an incredible opportunity that time and compounded savings can provide, see: A Penny Saved Is Seven Pennies Earned.

My advice to those nearing Social Security age is as follows:

1. Go online, register, and really look at your statements. Make sure they are correct.

2. Hold off taking social security at 62, and even at Full Retirement Age (currently 66 and increasing to 67) if you can. There’s a major financial advantage to holding off until age 70, if you are able—unless you really need the money now and/or have serious illness that may shorten your life expectancy.

3. If you are married and/or divorced, understand the various strategies. They are complex. Take a visit to the social security office and spend time

Reports of the program “running out of money” don’t take into consideration the fine tuning that will inevitably happen. So to the issue about whether the program will last….. the answer is: yes, it will. It would be a disaster to allow it collapse. And there are tactics to help stabilize the program and not run out of money in 15 years. Those fine tunings include again raising the retirement age, changing the COLA formula, raising the ceiling on amount on which you pay, etc. We will probably see a combo of these adjustments in the future.

The good thing about shining a light on Social Security is that it makes Americans of all ages more deeply consider all the issues related to retirement and do so at an even earlier age. With Americans living longer, retirement planning becomes far more important. Wise men and women consider the issues long before the reality hits them. And wise people understand that they need to save far more than Social Security can provide.

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