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Social Security, A Liability To Some?

11718507_sLast Wednesday night, I taught a class at the Plymouth campus of Cape Cod Community College on how to create a retirement system for folks approaching retirement. Part of the class is geared toward income planning and how Social Security plays into that. This was a hot topic for that crowd. One-half of a nice couple, let’s call her Karen, in the back of the room raised her hand and asked me this: “We always have been a double-income house, earning a half decent living. Will we ever get back what we put into the system?” And, “What will happen to the program for my kids?”
 
Hmmm . . . two very good questions. Questions that I want to discuss with you this week.
 
Folks, it’s a well-accepted fact for most investors they can’t depend on Social Security to provide a source of income that can realistically support them in their retirement. What is surprising to many is that the amount of lifetime benefits they receive will not total the amount they have paid into the system.
 
Laura Sanders from the Wall Street Journal recently wrote an article on this issue, helping to explain the potential liability of Social Security.The truth is that low earners, who are at the heart of the Social Security system, receive more in benefits than they pay in over their working years. This is supplemented by the fact that some high earners will receive less in benefits than they pay in, resulting in an overall lifetime loss of funds.
 
The Social Security system has been in the headlines lately, due to an announcement that the Social Security Administration would be raising benefits for 2017 by only .3 percent as an inflation-based Cost of Living Adjustment (COLA), following no increase for the past year. This is a serious problem for many who depend on this program to supply them with the means to purchase the necessities of life.
 
The wizards of Washington also announced they would be raising the maximum amount of earnings subject to the Social Security tax. That figure will climb 7.3 percent in 2017, from what was $118,500 to $127,200 in 2017. Many of us may not think much of this, as the difference is less than $10,000. That is not the point. This is the largest increase in history and, frankly, there are discussions to make the amount of earnings subject to Social Security tax unlimited. The recent increase will affect an estimated 12 million working Americans. Those 12 million will be subject to the 6.2 percent Social Security tax on their taxable wages, including that additional $8,700, meaning, they will owe over $500 more in the upcoming year. This change puts a hit on employers as well, since employers pay the other half of the Social Security tax. And if you are self-employed, you get to pay both sides, for an additional 1,000 bucks next year. Lucky for you, if you are self-employed.
 
Ms. Sanders goes on to say in her article that the liability of Social Security starts at a much lower wage than that $127,200 figure. By one estimate, that level of receiving less than you put in starts at around $65,000 for a single worker, and about double that for couples with both workers earning around equal pay. You can see from the chart below, created by Caleb Quakenbush from the Tax Policy Center, based on estimates of people retiring in 2020, that some couples pay dramatically more money than they will receive in benefits over their lifetimes.
 
ss-payout
 
On the low end of the spectrum, a couple with just one person earning approximately $22,500 a year would pay in just under $130,000 over their lifetimes. What they would get back in benefits is more than twice that—over $300,000. You really don’t have to be a financial whiz to realize that this seems like a pretty good return on their investment.
 
On the other hand, if both spouses work (assuming they earn about the same pay), and each spouse earns just under $120,000, they will have paid in over $1.35 million, but can only expect to receive $1.02 million back in benefits. That’s a 25 percent loss over their lifetime.
 
But, it’s not just those double-earning couples who are getting the short end of the Social Security stick. Single taxpayers who are not eligible for a spousal benefit are losing out as well. Also, those people with especially long careers, careers lasting over 35 years, receive benefits based on only their highest 35 years of indexed earnings. They do not receive a proportional increase in benefits for any additional years of high earnings.
 
The younger generation is not off the hook, either. They have been told for nearly their entire lives that the Social Security system is in shambles. This is why, in the past, general advice for the younger generations and most folks planning to retire in the future has been to not plan on Social Security, or at least plan on a significantly different type of plan producing much less income to the recipient.
 
The class went on, to help Karen and the rest, that if your Social Security investment will result in a nearly guaranteed 25 percent loss, that’s even more reason to manage your benefits to get the most from what you will receive. For most of us, the same rule of thumb applies. Try to wait as long as you can to start withdrawing benefits and take advantage of any possible spousal benefits.
 
I finished the class by putting the website usdebtclock.org up on the screen. According to usdebtclock.org, Social Security is more than $15 trillion in debt, and it is not getting any better any time soon. Since 2010, Social Security has been paying out more in benefits than it has been taking in, adding to the downward spiral and further damaging benefits for current and future generations. For better or for worse, in my opinion, taxes will continue to rise and benefits will continue to get watered down.
 
Now, more than ever, is time to be vigilant and to stay alert. You do deserve more.