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Social Security – A Promise Breaking?

Social Security – A Promise Breaking?
September 12
00:03 2017

(The following is an excerpt from a chapter of the book From Cradle to Retirement – The Child IRA – How to start a newborn on the road to comfortable retirement while still in a cozy cradle.)

Franklin D. Roosevelt, in justifying his effort to pass the Social Security Act of 1935, offered this promise: “The Social Security Act was primarily designed to provide the average worker with same assurance that when cycles of unemployment come or when his working days are over, he will have enough money to live decently… It is the foundation upon which we hope in America to provide a real form of financial security for workers, so that the spectre of unemployment and old-age destitution may be banished from the American home and farm.” Does this promise continue to be fulfilled, or, as many believe, has it been slowly breaking over the decades since its inception? Let’s look at how the most recent Trustees Report addresses this matter.

When the 2017 Old-Age, Survivors, and Disability Insurance (OASDI) Trustees Report submitted their annual report to Congress on July 13, 2017, it contained some good news and some bad news. In the good news, the report, formally referred to as “The 2017 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds,” suggested the financial situation of the Social Security Trust Fund had improved from the previous year. On the other hand, it bluntly states “reserves become depleted in 2034.” Oh, that wasn’t the bad news. This is: The report goes on further to say “If substantial actions are deferred for several years, the changes necessary to maintain Social Security solvency would be concentrated on fewer years and fewer generations. Much larger changes would be necessary if action is deferred until the combined trust fund reserves become depleted in 2034.”

Yes, this sounds dire, and people have a right to be alarmed, and they are. A 2015 survey revealed “3 in 10 people under age 50 believe Social Security will have run dry by the time they file for benefits.”

This may be an overreaction. Timothy G. Wiedman, retired Associate Professor of Management & Human Resources at Doane University in Crete, Nebraska, says, “While the Social Security System will empty its so-called “trust fund” by the end of 2034 and begin running a deficit if Congress fails to make any changes, the current 12.4% payroll tax will still continue to generate billions upon billions of dollars for the system to disburse in the form of benefits.” Indeed, the OASDI Report states “After trust fund reserve depletion, continuing income is sufficient to support expenditures at a level of 77 percent of program cost for the rest of 2034, declining to 73 percent for 2091.”

Technical details like this, though, don’t erase the fact that the promise of Social Security has long been broken – and continues to be breaking as we move further from FDR’s original pronouncement. “The fact is, Social Security promises have been broken for years” Ilene Davis, of Financial Independence Services in Cocoa, Florida and Author of Wealthy by Choice: Choosing your way to a wealthier future. “It was supposed to max out at 1% each of income up to $3,000. It was never supposed to be taxable. Now anyone with a decent pension and some retirement funds is likely having to include 85% of their Social Security benefit as income – at a 25% tax bracket (not high) that’s effectively greater than a 20% ACTUAL REDUCTION in retirement benefits when you subtract the applicable taxes from the benefits. And, of course, the Medicare premium increases – but only for those who were responsible enough to build wealth. Moreover, Social Security doesn’t provide benefits, as originally promised, based on contributions. It rewards lower income workers at expense of higher income workers. All in all, a system totally biased in favor of the ‘less fortunate’. It’s nothing but another program to take money from those who took responsibility for their future to those who didn’t.”

Although considered sacrosanct today, Social Security was controversial from the moment of its inception and through its first several decades. It survived an initial constitutional challenge. In 1937, the Supreme Court ruled in favor of the act in the cases of Helvering vs. Davis, and Steward Machine Co. vs. Davis. Even before the onset of hostilities of the second World War, Social Security’s exposed underbelly of fiscal vulnerability became apparent. In February of 1940, former Congressman turned journalist Samuel B. Pettengill wrote this in his column concerning the dangers of Social Security: “…suppose these other businesses are themselves losing money and the government’s ability to borrow or tax is therefore getting less. Under such circumstances how good is any promise of social security even the promise of government itself?”

Pettengill’s comments might be considered the usual partisan banter, to use today’s vernacular. If you want to see something eerily prescient, take a look at this: In a 1950 study, the Chamber of Commerce of the United States predicted the very condition Davis has expressed concerns about nearly 70 years later. The Chamber’s study stated, “existing welfare and security programs — Social Security, Unemployment Insurance, Workmen’s Compensation, etc. — will cost 18 per cent of payrolls in a generation.”

The rapid expansion of the payroll tax likely came about because the original “promise” of Social Security has been greatly expanded. “Social Security was designed to help the destitute and poor, not the average person,” Robert Kratzer Everett, Retirement Plan Consultant for Northeast Planning Associates, Inc. in Cambridge, Massachusetts and author of Retirement Savings Made Simple: The 401(k). “At its core, it is a system that was instituted in the United states 82 years ago during the Great Depression, to help a small group of poor and elderly people by providing a supplemental amount to their other income. Today, unfortunately, it is providing the main source of income for many, if not most, retirees; therefore, it should be of no surprise with our country’s demographics that expenses are greater than the inflow of new money coming into the system.”

“Social Security was meant to be an aid for those who could not work due to disability or retired,” says Charles Thorngren, CEO of Noble Gold Investments in Pasadena, California. “It was never designed to be the entire means to provide for oneself. When the program was started, Franklin D Roosevelt said, ‘We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life… we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.’”

Roosevelt’s words addressed the extreme condition many people, especially the elderly, experienced during the worst of the Depression. Joseph Gissy of Capital Management Services, located in Westlake Village, California, is a National Social Security Advisor. He says, “When Social Security was designed we had a high poverty rate for seniors coming out of the Great Depression. So, it was meant to help those in dire straits, not as the main source of retirement vehicle for all retiree’s in America.”

Though these views come from contemporary sources, they aren’t new. Shortly after the Act’s tenth anniversary, the editors of the Buffalo Evening News wrote, “The basic purpose of Social Security is eminently laudable. It is to provide a foundation, at or near the bare subsistence level, on which anyone can build his own economic security to his own taste by his own efforts. But the cradle-to-grave extremists have so distorted this concept that a large segment of the people have the idea that the Government has promised them not merely a foundation on which to build, but a featherbed in which to lie. The person who finds security in contemplating an old-age pittance of 67 cents a day can relax, perhaps, and let the Government do his worrying. But those with aspirations a bit loftier may find, if they take a sober look at the prospects, that there is still virtue in thrift—even in this so-called age Social Security.”

It’s not hard to understand why Social Security is breaking. “When the program started, the average life expectancy for a man was 58 and 62 for a women, and the benefits did not start until 65,” says Michelle Morar, a financial advisor with Innovative Insurance Solutions in Greensboro, North Carolina. To put this in perspective, what would the retirement age be if the Social Security Act were to be enacted today under the same circumstances it was in 1935? In 2014, the Organization for Economic Co-operation and Development stated the average life expectancy for men and women in the United States was 76.5 and 81.3 years respectively. Give these life expectancies, the Social Security retirement age today would be 84 years.

“Social Security was never meant to last more than a few years,” says Gissy. “Life expectancy in 1940 was much lower than it is today. When the program was designed we were only meant to live on it for 6 months to a year.”

Morar agrees. She says “the cause of insolvency is the fact that a large percentage of our population is living well into their nineties and above. The greatest percentage of increase in an age group is the 100-year-old group. The program was not designed to sustain the amount of people who are living longer and longer.”

“The population of elder, Social Security recipients continues to increase,” says Brian Kulick, Wealth Management & Legacy Planner and Franchise owner of American Prosperity Group in Centreville, Virginia. “This is due to the simple fact that Americans are living longer resulting in greater cumulative benefits received by retirees than ever before. When originally designed, Social Security was not expected to provide benefits to retirees for decades. Thus, as each recipient receives more cumulative benefit that originally designed, the trust fund is exhausted more and more.”

It’s more than people living longer. The scope of Social Security has expanded considerably. “It’s pretty simple, we have more people taking money out than we have people adding money into the system,” says Gissy.

“The Social Security problem is many fold,” says James R. Miller, President of Woodward Financial Advisors, Inc. in Chapel Hill, North Carolina. Besides people living much longer than expected, he points out the situation where “many people collecting off one worker’s benefit (spouse, child, widow, ex-spouse, etc, and, spousal optimization strategies that may not have been expected.”

So, the promise of Social Security may not yet be broke, but it’s certainly in the process of breaking. “The pending insolvency isn’t a surprise,” says Todd Burkhalter, CEO of Drive Planning in Atlanta, Georgia. “Basic economics says you can’t spend more than you make and maintain sustainability.”

While Social Security is not going “bankrupt,” it’s clear it will have to change in both a fundamental and disruptive way. For this reason, many financial professionals are telling their younger clients to plan on not receiving Social Security when they retire.

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Christopher Carosa is a keynote speaker, journalist, and the author of  401(k) Fiduciary SolutionsHey! What’s My Number? How to Improve the Odds You Will Retire in Comfort and several other books on innovative retirement solutions, practical business tips, and the history of the wonderful Western New York region. Follow him on Twitter, Facebook, and LinkedIn.

Mr. Carosa is available for keynote speaking engagements, especially in venues located in the Northeast, MidAtantic and Midwestern regions of the United States and in the Toronto region of Canada.

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Christopher Carosa, CTFA

Christopher Carosa, CTFA

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