| by Glenn J. Downing, MBA, CFP® |
A common question I’m asked in a financial planning engagement is this: Glenn, should I plan on receiving Social Security? Will it even be there for me? I’ll say yes – plan on it. Social Security is the third rail of politics, and it is my belief that it will always be there in some form or another. The third rail. What does that mean? In any city with a metro, the train cars have a foot that runs along an electrified 3rd rail. You can see this clearly on Miami’s own Metrorail. But to touch it is pretty much instantaneous death. Capisce?
Throughout its history Congress has bought itself votes by increasing the benefit, but they haven’t always raised revenue, i.e. taxes, in a commensurate fashion.
What’s being talked about now?
A few things are being discussed in Congress:
- Raising NRA again. Current NRA is between 66 and 67 as the age rise is being phased in. If you were born in 1960 or later it is 67 for you. Congress has begun talking about moving the age up to age 70.
- Raise payroll taxes again. Not likely to get a Congressman re-elected.
- Add a means test. This changes the program dramatically from social insurance to a welfare benefit. Social Security becomes another redistribution effort.
- Increase the income threshold. Currently (2023) the 6.2% Social Security tax is levied against wages and business income up to $160,200 per person. Congress would collect a lot more money if they raised that limit up.
- Privatize it. There is a precedent for this – Chile has privatized its social insurance, apparently with considerable success. People have a choice of investment accounts into which they can allocate their funds.
A Valuable Benefit
Wherever the program ends up is anyone’s guess. But it is a very valuable benefit in retirement. Consider this: if I retire at age 67 with a benefit of $2,000/month, and expect to live to age 90, at 6% the present value of this stream of income is nearly $300,000. This means that at age 67, if I invested a lump sum of $300,000 at 6%, and drew it down by $2,000/month, the money would last to my age 90. Any way you look at it, this is a considerable benefit.
Let’s do one more calculation. Say I came out of college at age 22 and earned a steady $60,000 for the rest of my working life, to age 67. That’s 45 years. I would have deferred $3,720 each year, which my employer would have matched. What if instead I had invested both my half and my employer’s half in my own brokerage account, and earned a steady 6% rate of return? I would have accumulated a little more than $1.5 million. There’s a lot to be said for taking a close look at Chile’s example.
Would you like further information? Please be sure to read Social Security Benefits and Taxation of Social Security Benefits
