With all the recent talk about the Trump tax reforms’ potential impact on Social Security and Medicare, I dove into “The Future Financial Status of the Social Security Program” on the Social Security Administration web site. It’s a scintillating read, trust me.  Check it out and tell me you don’t agree.  The political left is suggesting that after handing money to millionaires and billionaires, the Trump Administration will now need to cut these middle class “entitlement” programs. That could be little more than posturing for political purposes, but the truth is changes do need to be made to Social Security and the sweeping tax legislation just passed missed an opportunity to do so while still cutting corporate taxes.  The SSA is non-political so they only suggest that the American people, through their elected representatives, will have to act.  Will we?

Many people are worried about their retirement income. They should be, and not only because of concerns about Social Security solvency but because, at best, Social Security will provide a subsistence level existence.  Too many people have just not saved enough, and unless you work for the government or are in one of a few other professions with strong unions like teaching, it’s likely you don’t have a pension.  I hear a lot of people saying, “I’ll just have to work for the rest of my life.”  This supposes, of course, that someone will want to employ the 70 or 80 year old version of you.  Maybe someone will, or maybe you’ll find a way to be self-employed, but that is a risky approach to your golden years.  The bottom line is that you need to be saving as much as you can now, even if it’s only a little bit.  I wish I had been more responsible myself, so this isn’t a holier-than-thou lecture.  I’ve done my best to make up for lost time, but I regret some earlier indulgences.  It’s so easy to buy more than we need and when we’re young retirement seems eons away.  Enjoying life is important but planning for the future is, too.  The future will not take care of itself…you have to take care of it.  As any financial advisor will tell you, the beauty of growing savings is compounding over time…the more time the better.  On so many levels, we have become an instant gratification society.  I hear and read about the privations of past generations (my folks were both Depression/WWII children); with whatever challenges we face, we have it easy today.  My parents got married in 1952, both earned PhDs, but they didn’t get their first new car until 1968.  And it was a Plymouth Valiant…Slant6 engine that sounded like a sewing machine under the hood, roll-up windows, no AC…cheapest damn car on the lot.  Yet, subsequent generations expect more and better.  I’m not saying that’s a bad thing but it is up to us as individuals, not the government, to make it real.  Max out your education, which can take many forms and should go on for your lifetime, and work your ass off!  Then you’ll be probably be OK.

Getting back to Social Security, the good news is that even if we do nothing (but we should do something!) it’s fully solvent for the next 20 years or so; if you are already receiving benefits or are about to, you probably don’t have much to worry about…except what happens for your kids, that is. Social Security was designed as a “PayGo” system.  This means the currently employed are funding the retirement of the non-working retirees and disabled though taxes.  Seems unfair, perhaps, but someday it will be your turn.  To de-risk Social Security, Trust Funds were established (one for retirement and one for the disability benefits) and these are currently bulging with about $2.5 Trillion dollars.  That would pay for at least one good war.  However, the actuarial projections suggest that the Trust Funds will be exhausted by 2030 (pessimistic), 2037 (intermediate) or Don’t Worry About It (optimistic).  This doesn’t mean that there will be NO MONEY to pay benefits, only that all benefits would need to be paid only from the current tax intake, estimated at about 70% of benefits in 2037.  If we end up there, taxes would either have to go way up or the benefits would have to come way down.  The Social Security Trusts funds are unique in that they can’t just go and borrow money…unlike the rest of our government that simply borrows more when needed, mostly from the “unfair” Chinese, and acts like it’s no big deal.   So consider the Trust Funds a generous cushion.  Prior Amendments (1972, 1977, 1983) to the program via increases in taxes (currently 12.2%, shared by employers and employees…our “payroll taxes”), delays in the full retirement age, and making Social Security benefits taxable took us from the brink of exhausting these Trust Funds in 1983 to our current big surplus.  According to the SSA, putting the funds back to a 75 year DWAI level (I can make my own acronyms on my blog) would require a 2% increase in payroll taxes (shared by employer/employee), or a reduction in benefits (“f’that” will be the resounding reply, I’m sure) or a further delay in the full benefits age (it is 67 now for people born after 1965, with reduced benefits available at 62).  Or most likely some combination of these variables hashed out in dramatic partisan fashion by our elected representatives.  They don’t mention raising the salary level that is subject to Social Security and Medicare taxes, but that has been steadily happening; to the annoyance of higher income earners who feel like they will never see that money back, rightly or wrongly.  The point is there are a number of ways to tweak Social Security.  The sooner Congress acts, the more gradual the changes can be made.  But Congress is really good at playing “kick the can down the road” on Social Security and the Republicans’ sweeping tax revision missed an opportunity to address it, in my view. Congress trimmed corporate taxes with a goal of making U.S. businesses more competitive globally and driving more U.S. investment (worthy goals) but they could have also mandated that businesses pick up the 2% additional Social Security funding as part of the bargain, or perhaps split this 1.5%/.5% with employees.  Good for business and good for employees.  Problem sorted!  I’ve very pro-business – I have always been in private business­ – but given that very few businesses provide a defined benefits pension anymore, this seems an acceptable trade-off.  (The reality is businesses will adjust salaries over time to accommodate all the benefits, anyway.)

On an individual level, if you actually see a reduction from this tax cut and are not among the very wealthy who don’t need to worry about retirement savings, I suggest you put what you can into an IRA for 401K program.

So why are the Trust Funds expected to be depleted sometime in the next 20 years?  Good question!  It turns out that it’s not because we’re not living longer (although we are).  It’s because of two key factors.  First, the big baby boomer generation (born 1946-1965) is retiring in droves and taking their benefits.  Secondly, the birth rate has dropped over the generations from three kids per women to two.  In other words, when once three workers could support a retiree’s benefits there will only be two workers funding that retiree’s benefits in the future (they’re modest benefits, remember…don’t be thinking  you are literally supporting the retiree).  Since I don’t expect we’ll change the birthrate (it may well slip further), if we want this problem to become less dire there is only one apparent solution and I find it ironic given the current political climate – immigration.  Japan, in particular, but also European countries that have restricted immigration, have really big problems with their aging population that are already having serious consequences that will worsen dramatically in the years to come.  So if you are opposed to “foreigners” coming in to the country, keep in mind that they may be necessary to help support you or your children in your old age.  I appreciate that we need a sensible immigration policy that allows for reasonable controls over who comes in and why, but we should not cast too wide a net with restrictions.  We should also be aware that anti-immigrant rhetoric can be an inhibitor to the people we do want to join us, many of whom would come from non-European places (take a look at who has designed the computer programs you use every day…).  In my experience with people in other places, the “American Dream” is looking a lot less appealing these days.  On so many levels, it is our very openness to people and ideas from around the world that has kept America a vibrant, growing country and only that will guarantee future prosperity for all of us.

Peace on Earth, Goodwill to Man.