As an investment advisor, when sitting down and starting work with new clients, there are questions that will undoubtedly be asked. Any decent advisor will start talking with you about your family and priorities and goals. They will ask questions about what you have done with your money in the past and what is important concerning your investments in the future. These are all important questions concerning how an investment plan should be set up. But I always feel that the impost important thing that an investment advisor discusses with clients, is their retirement income plan, and a key part of that is Social Security.
Now many of my clients have a knee jerk reaction to a discussion of Social Security in their retirement income plan. They have been told for years that Social Security is going to go bankrupt, and will not be there for them. Most of my younger clients don’t even want to consider Social Security…as if they are certain that the program will have completely disappeared by the time they leaving the workforce.
Social Security, for some reason, has been a very quiet topic on the campaign trail this year. Neither Trump nor Clinton talks about it much other than an occasional node to “saving/protecting Social Security”, but not much detail on how they would do so. This despite most estimations having us “running out” of Social Security funding within the next 18 to 30 years.
How much of the budget is currently being spent on Social Security? Well that depends on who you ask. Just going by what I see coming across my Facebook and other Social site…there is a lot of misleading information out there. Many of the stories by more liberal leaning sites show figures for discretionary spending so that the budget for defense is inflated. Many of the conservative sites like to include other programs such as Medicare and lump them together in a category called “entitlements.” This has the tendency to inflate the problem that Social Security is having. The budget totals I like to look at are the percentages of budget including discretionary and mandatory spending…otherwise known as “what we actually are spending our budget on, after interest expenditures.”
How taxes are allocated by Congress:
Currently the Social Security system is not actually going bankrupt. In fact the Social Security trust fund reserve is still growing and is projected to grow for another two or three years. At that point it is expected that enough workers will leave the workforce and the surplus will become a deficit. See the detail here: https://www.ssa.gov/policy/docs/ssb/v75n1/v75n1p1.html
The $2.8 trillion Social Security reserve was built up primarily by payroll taxes initiated in 1984. For those of you who don’t remember, Ronald Reagan was in the White House, Republicans controlled the Senate and the house was narrowly controlled by the Democrats and Tip O’Neill. This was back when the President and the House occasionally discussed domestic issues.
With two weeks to go before the election, I thought that it would be interesting to take a look at the Trump and Clinton campaigns and see how their Social Security plans differ. After days of searching, I have not been able to find any information from the Trump campaign on how they would save Social Security. Other than that Mr. Trump would “save Social Security.” The Clinton campaign doesn’t discuss the issue in much detail either. Indicating in her online plan:
Preserve Social Security for decades to come by asking the wealthiest to contribute more…including options to tax some of their income above the current Social Security cap and taxing some of their income not currently taken into account by the Social Security system.
Saving Social Security is actually quite simple. There are really only a few components of the system:
- Add more workers. But since it takes a little while for a country to “grow their own.” And it is a little tricky to ask the country’s population to copulate at a higher rate (the average couple would have to produce roughly 4.2 children), we are talking about immigration. Currently we would need to roughly quadruple the current rate of immigration to keep up with Social Security projections.
- Get a better rate on the Social Security Trust Fund. Currently the fund is invested primarily in bond related securities. Bonds are at a historically low yield, and the fund is currently producing roughly a 3.0 yield. Some stock market exposure could help boost the yield over long term periods, but would provide additional volatility in the Social Security Trust Fund balance.
- Raise the retirement age. Now this doesn’t mean that we would require workers to work longer. Just that we would require workers to wait a little longer before accessing the benefits of Social Security. Currently the “Full Retirement Benefit” for workers is age 67. If this was increased to age 75, current projections would allow for continuation of Social Security at currently levels.
- You can raise taxes and actually use them for Social Security instead of just saying that and then using it on military or interest expenses.
I am a large proponent of doing several of these options partially rather than having one dominate the discussion. Moving the “full retirement benefit” to 70 over the course of the next 15 years, investing 20 percent of the Social Security Trust Fund in diversified index investments, and doubling the amount of legal immigrants between the ages of 18 and 40 would go a long way to solving our Social Security problem.
As of right now, the problems are fixable. Every year we wait, the numbers in the paragraph above become more and more problematic. Investment advisors have a bit of a conundrum on their hands. Some clients will want to disregard Social Security all together in their planning. When I am doing investment planning I have used the “discount approach” where we take projections of Social Security…but then assume that Washington is only going to solve the problem 70 percent of the way. Discuss this type of thing with your investment advisor, they should be actively planning for your retirement including Social Security.
Adam Faust, Founder – Deep Blue Financial