Musings about early retirement with no fixed address

Why I Count On Social Security

There’s a recurring theme in the media that Social Security will not be around for much longer. Anytime SS makes the news cycle for any reason, multiple discussions pop up about why it’s doomed. According to a 2015 Gallup Poll, over half of the working public expects to receive zero dollars from Social Security. Especially within early retirement circles, there seems to be a misguided badge of honor to plan a retirement without any SS payments. For a bunch of people who analyze numbers and build spreadsheets for fun, I find it dumbfounding that any of them would voluntarily decide to ignore all pertinent data and plan for zero. Especially because the result of ignoring Social Security is several extra years of unnecessary work. I’m not sure whether this is rooted in general anti-government sentiment or simply good old fashioned pessimism, but the idea of collecting nothing is completely unfounded.

The sign says it all

Social Security Stats and Projections

First, let’s start with the facts pulled directly from the 2018 Annual Trustees Report by the Social Security Administration. Throughout the program’s history, SS has been revenue positive. It has collected roughly $20.9 trillion and paid out $18.0 trillion, leaving asset reserves of $2.9 trillion as of the end of 2017. This overage is what constitutes the Social Security Trust Fund. Benefit payments began drawing upon this Trust Fund in 2018, as more was paid out than collected in SS tax for the first time.**  Without a course correction, SS payments will continue to be greater than tax receipts until the SS Trust Fund is exhausted in 2034. Reports of the Trust Fund going to zero is what perpetuates the doom and gloom idea that SS benefits will cease to exist. But Trust Fund depletion does not mean that there are no longer funds for Social Security payments. It simply means that the tax receipts (past and present) are no longer able to cover the current benefit costs. In this regard, it is the same as every other federal government program.

** This is a projection based on 2017 numbers and prior trends. Everything that I’ve read states that it’s all but certain 2018 is the year depletion of the Trust Fund will start, however it cannot be 100% verified until the official 2018 numbers are released in June 2019.

However, if we collectively decide that this is the one federal program that must be fully funded by tax receipts, and no changes are made to bolster the program, then the result is simply a one quarter reduction in benefits. Per the Trustees, “The combined [Social Security] trust funds have a projected depletion date of 2034, the same as in last year’s report. After the depletion of reserves, continuing tax income would be sufficient to pay 79 percent of scheduled benefits in 2034 and 74 percent in 2092.” I’m not sure about you, but I expect to stop collecting Social Security well before the year 2092 when I’d be 115 years old. As such, even a very conservative plan should count on receiving 74% of the current scheduled benefits because tax receipts will cover that amount until death. However, there are plenty of options to fix the shortfall and the program’s benefits are so widespread that I fully expect no cuts to the promised amounts. Why?

Even with a missing piece, there’s still a lot of pie left

Old People Vote

If there is one universal truth in politics, it’s that old people vote. And that’s only growing more true with each passing year. Current trends have older people making up a greater portion of the voting electorate in every election. According to this Census Bureau report, people ages 45 or older accounted for 61.8% of the votes received in 2016. This is up from 55.5% in 2000 and 49.3% in 1980. And considering the the average age of our population is increasing and has been for a while, this is not a trend that I expect to see reversed any time soon. It’s just not conceivable that our aging population, the one that directly benefits from the program, would agree to do away with it entirely. Letting it get to the point where they accept only three quarters of their promised benefits also seems unlikely. Politicians of all stripes know that Social Security is extremely popular and even beyond that, absolutely necessary.

This guy will fight for what’s his

Savings Rates of the General Population

Most people just do not save money in any significant sum, for retirement or otherwise. Regardless of the reasons why, savings amounts for the general population are woefully inadequate. A recent federal survey revealed that 40% of Americans can’t cover a $400 expense. That’s shocking in and of itself, but it also revealed that one quarter of adults have zero retirement savings. Zero!

Now obviously some of these numbers are being dragged down by young people just starting their careers. Luckily, we have the data by age group, so we can ignore younger people and look directly at those close to traditional retirement age. For people in their 50s, the median retirement savings is only $117,000. Even for people in their 60s, when they should be retiring, the median retirement savings is a paltry $172,000. Imagining a world without SS payments, using the 4% rule our median 60-something retiree’s portfolio balance would generate less than $7k/yr.

Of course the 4% rule assumes that you’re invested in a balanced portfolio of stocks and bonds. This is not the case for most people, as they either lack the knowledge or the patience to invest. It’s not all that surprising that even among those with 401k accounts and retirement savings, 60% of them have “little or no comfort managing their investments”. So not only are people not saving, those that are saving aren’t doing a good job of investing. Their returns are even likely to perform worse than the accounts of dead people. In short, the vast majority of Americans are woefully underprepared for retirement.

Fancy cars today instead of secure retirements tomorrow, it’s the American way.

Means Testing

There’s also a prevalent idea out there that Social Security payments could become means tested. But this ignores the fact that in practice, SS is already means tested. The monthly payments are subject to income tax based on AGI. Having an AGI of over $32,000 as married filing jointly means that 50% of your SS benefits are subject to taxes. An AGI over $44,000 increases that to 85% of benefits being subject to tax. As such, anyone with a decent amount of additional income from their investment accounts will have their payments reduced at tax time due to their other wealth.

Collecting SS payments also coincides with Required Minimum Distributions. Upon turning 70.5, people are required to begin withdrawals from their pre-tax retirement accounts (like a 401k, 403b, or traditional IRAs). These distributions are taxed at regular income rates. The combined effect of this is that people who have a lot of money also tend to have a lot of pre-tax money. The RMDs mean that they are required to generate income from their pre-tax accounts. Generating this income makes their SS payments taxable. This is exactly what means testing looks like, even if there’s no hard cap on receiving payments based on wealth.

If a train is traveling at 100mph in one direction and a car 65mph in the other, at what point will my SS benefits be taxed?

A Successful Retirement Result

Even if further and more draconian means testing is implemented, that’s still not something that I am worried about. That’s because if my retirement follows the likely probability of being highly successful, and I have millions of dollars when I get to the age of eligibility for SS, then I don’t care if I receive the payments or not. My retirement will be a success without them and life will be good.

However, if I am unlucky in retirement and need to spend through some of the principal of my portfolio prior to taking Social Security, then I would qualify for those promised payments under nearly any means testing schedule. Those payments would then provide a serious ballast to my portfolio at that time. But I don’t expect further means testing to be implemented. This is mostly because income-based taxation is the norm in the US and switching to a wealth-based model would be a gigantic deviation from that. People don’t like drastic change when non-drastic options are available. But even if it happens I’m still basically guaranteed to be in a winning position.

The future is bright

It’s An Easy Fix

The Social Security Board of Trustees projects that “changes equivalent to an immediate reduction in benefits of about 13 percent, or an immediate increase in the combined payroll tax rate from 12.4 percent to 14.4 percent, or some combination of these changes, would be sufficient to allow full payment of the scheduled benefits for the next 75 years.” If the political will was there to implement changes today, workers would pay 1% more in SS tax, employers would pay 1% more in SS tax, and SS would then have the funds to pay 100% of proposed benefits for the next 75 years. That probably makes too much sense though.

Alternatively, current SS taxes are only paid at income below $132,900 for 2019 and any income above that threshold is not subject SS taxes. Removing that income cap would replace 86% of the 75 year shortfall and essentially fix the program as well. Or if it’s preferable to not raise taxes at all, then there are a handful of proposals from the SSA to raise the eligibility age. But these proposals would only help decrease the shortfall while not actually closing it. Because of that, it’s difficult to see a way to do this without raising taxes, but at the same time, the taxes needed should not be that hard to come up with.

Plenty of tools available, it’s just a matter of choosing one

Summary

Our population’s average age is advancing and the first rule of politics is that old people vote. It’s inconceivable that the majority of voters would decide that a program which directly affects them (or soon will) is unworthy of attention. This is especially true considering how many people are underprepared for retirement, even those near traditional retirement age. While means testing is already in place and further means testing is possible, it’s almost entirely inconsequential because any faltering portfolio would certainly still qualify to receive SS benefits.

Despite the claims that this is a major problem, it’s actually really easy to fix. Options include a slight tax increase for everyone, a larger tax increase for the highest earners, a benefits reduction, or some combination of these. And even if no fixes are implemented, which seems unlikely considering demographics and abysmal savings rates, then SS would still pay 74% of promised benefits through 2092. As such, this is the minimum amount that would be prudent to use for conservative planning purposes. Any number less than this, especially zero, is rooted in irrational fear instead of careful analysis. And there’s no badge of honor for that.

Do you count on Social Security? Did I miss a reason why or why not? Comment below.

13 Comments

  1. A Purple Life

    Great analysis! I don’t currently include Social Security in my plan, but I do think I will receive it because of all the reasons you state above. I’m already at 100% chance of success in my calculations and projections, but maybe I should include it in my plan and see what happens. It would make those portfolio end numbers look even better. Hmm…Thanks for making me think!

    • Eric

      This was like writing a term paper! As long as you made it through without falling asleep, and it made you think, then I consider that a success. Thanks for the nice comment. 🙂

  2. David @iretiredyoung

    I think that it’s valid to include social security in your calcs. I can’t see them disappearing, that would be political suicide. I can however imagine that they could be paid later, and perhaps include more means testing (but if you don’t meet the means test then presumably you have enough money anyway, or at least enough to live on).
    Having said that, I currently project that I won’t need to rely on social security to fund my retirement. In which case, I treat it as a great insurance policy, just in case something goes wrong.

    • Eric

      It’s definitely a great insurance policy. While I didn’t get into it above, I like to think of it as longevity insurance, in case something catastrophic happens to my portfolio late in life. Like you, I’m assuming that I won’t actually *need* the money, but it’s nice to know it’ll be there in some form just in case.

  3. Joe (AdventuringAlong.com)

    I absolutely agree and wrote something similar in the past. I decided to link to it, so I googled and found it: https://forum.mrmoneymustache.com/ask-a-mustachian/social-security-do-you-plan-on-it/msg625/#msg625

    Interestingly, the numbers have chained what I’d consider a fair amount in the 7 years since I wrote that (two days after the MMM forum launched).

    I had there (stats were written in early 2012, and I likely sourced them from 2010 stats, since it is unlikely 2011 data was out yet):
    – the fund would keep growing until 2027. You have that it will likely have stopped growing and start drawing down in 2018, a full 9 years earlier.
    – the fund would fund 100% of benefits until 2041. You have that it will stop that (assuming no changes) in 2034, a full 7 years earlier.

    I’m curious why the changes have been so drastic. Was something done in the intermittent time to lower SS taxes (related to ACA? Other tax cuts?). If not, how did those projections change so drastically? And if 7 years caused that much change in the projection, I wonder what another decade will do.

    I’m still not worried, and think one should definitely count on getting a good chunk of SS, as I argued there, and you argued here. But the changes are definitely making me cock my head and wonder.

    • Eric

      You raise some really good questions. I’ve spent a fair amount of time looking into this. Of course actuarial projections are subject to change, but I’m surprised they would’ve changed that much. I’m having trouble substantiating the numbers you listed in that post. When I pull up the historical SS Trustees report from here (where you can select any year) https://www.ssa.gov/oact/TR/index.html the 2010 numbers and projections are a bit different. I clicked through to the 2010 summary https://www.ssa.gov/oact/TRSUM/2010/index.html where they have the following projections. Combined Trust fund exhaustion in 2037 (compared to the now projected 2034) and then 75% of promised benefits after that (so the same as written in the post above, but just starting a bit earlier).

      So while it’s definitely a bit concerning that exhaustion of the SS Trust Fund seems to be speeding up compared to past projections, I think overall that just means that we’ll have to take action earlier and the overall conservative planning scenario doesn’t really change.

      One issue could be that the SS Trustees have and report on 3 different SS trust funds (plus Medicare separately as well). Personally, I only wrote about them in a combined manner above, referencing the OASDI (Old Age, Survivors, and Disability Insurance), which I think is most common way you’ll see it referenced in the media. But if, for example, you happened to accidentally grab the numbers just for just one of them, then that would be different than the stats for the combined funds.

    • Terran

      I’m a little late to the party here, but just got around to reading the post. Regarding Joe’s question of why the projections might have gotten so much worse from 2010 to 2018, I wonder if it’s as simple as treasury bond rates having gone down in the intervening years? If the projections were based on higher yields for the trust fund investments (which are all government securities), that that might explain the change. You can see reports of how the trust fund was invested for any month here: https://www.ssa.gov/OACT/ProgData/investheld.html. The average rate of return of investments in December 2010 was 4.444%, and in December 2018 it was 2.850%. Future rate expectations used in the projections might be lower now than they were in 2010 too.

  4. Jason

    Now, wouldn’t it be nice if that $2.9 trillion trust fund were invested in the market, rather than treasury bills. It might be even longer before change to funding/payout is needed.

    • Eric

      I agree in theory, but there’s probably a conflict of interest with the government taking tax dollars and investing them in private companies. I really don’t want to picture the arguments from our know-nothing representatives about how to invest it.

  5. Loi

    Nice post and very helpful for everybody. Keep up the good work! I’m going to check out the rest of your articles soon as it’s 3am now.

    • Eric

      Thanks Loi! Glad you liked it.

  6. Dan

    I count Social Security in my retirement planning. I run the numbers a few different ways. I multiple my current Social Security estimate (full retirement age) x 70% to get one scenario. I also take my current Social Security estimate (full retirement age) but assume full retirement age is pushed back to age 70. I run a third scenario where I use my current Social Security estimate (full retirement age) and assume age 67 is the full-retirement age. This is the scenario where I assume they will raise FICA taxes to make up the shortfall.

    Raising FICA taxes is the best case scenario for me because I will probably be retired before Congress passes the tax increase.

    • Eric

      That sounds like a pretty good plan. Naturally it’s impossible to know exactly what’s in store, so planning for a range of outcomes seems best.

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