I've written frequently about debt and its effects on our economy. John Mauldin draws the inescapable conclusion about federal government debt, and how it may - almost certainly will - impact our retirement.
The projected total US debt will be $30 trillion within 10 years, using the CBO’s own numbers. But the CBO also makes the rosy assumptions that there will be no recessions and that GDP will grow at a 4% nominal rate ... If you asked me to bet the “over/under” on the debt in 2027, I would bet the over at $35 trillion.
. . .
Note: That ... does not take into account the off-budget deficit that still ends up having to be borrowed. Last year the deficit was well over $1 trillion—but we were told it was in the neighborhood of $600 billion.
If any normal company tried to use accounting like the US Congress does, the SEC would rightly declare it fraudulent and shut it down immediately.
. . .
... looking at the demographic reality of longer lifespans and lower birthrates, it’s hard to believe Social Security can survive over the long run in anything like its present form.
But any major change will mean that the government is breaking its promise to workers and retirees.
And now we come to the really uncomfortable part.
Larry Kotlikoff wrote in an article on Forbes that we would need an immediate approximately 50% increase in taxes to fund our future deficits. That’s what we would need to create a true entitlements “lockbox” with the funds actually in it.
But surely everybody knows by now that there is no lockbox with Social Security funds in it. That money was spent on other government programs and debts. And so when the CBO doesn’t count the trust funds as part of the national debt, they are not only being disingenuous, I think they are committing financial fraud.
The money that will actually pay for Social Security and Medicare down the road is going to have to come out of future taxes, just as for any other debt of the US.
So at some point – even though Republicans are jawboning hard about cutting taxes now – we are going to have to raise taxes in order to fund Social Security and Medicare. I personally think it will have to be done with a value-added tax (VAT), because the necessary increase in income taxes would totally destroy the economy and potential growth.
. . .
But the simple fact of the matter is that no Congress is going to fund Social Security and Medicare through tax hikes. Before they ever go there, they will means-test Social Security and increase the retirement age – which they should.
There's more at the link.
So, if you're expecting to rely on Social Security for any part of your retirement income (let alone a significant proportion of it), keep in mind:
- SS is very likely to become a means-tested program, meaning that only those who lack other means of financial survival will get it (or part of it). No matter how much you, personally, have paid in Social security "contributions" (for which read "taxes"), you are no longer guaranteed a return on that money. It'll depend on your net worth and other financial factors.
- Your tax burden is almost certain to increase, whether by direct or indirect means. Therefore, you may get less than you expected from SS, and you may have to pay out more in taxes - a double financial whammy.
I think the odds of both happening are pretty darn good, as Mr. Mauldin points out. Mathematics is a hard science, not a feeling or an opinion. If the money isn't there, it can't be spent; and if Congress wants to spend it, it has to find more money somewhere. Either way, we're the victims.
Peter
So, if you're expecting to rely on Social Security for any part of your retirement income (let alone a significant proportion of it), keep in mind:
ReplyDelete1. SS is very likely to become a means-tested program, meaning that only those who lack other means of financial survival will get it (or part of it).
Note the inherent perverse incentive here. If you plan to make SS part of your savings goal, you won't get SS. If you don't save you will get SS.
The result is you either save like crazy and live on your savings in retirement or you don't save at all and live on SS (such as it is). Live well below your means now or live in poverty in the future.
Classic big government stuff.
FWIW, back in the '80s, when I was over 30 years from retirement, it occurred to me that SS wasn't going to survive and I needed to save as best as I could. I've been expecting "means testing" for at least 25 years.
FWIW, back in the '80s, when I was over 30 years from retirement, it occurred to me that SS wasn't going to survive and I needed to save as best as I could. I've been expecting "means testing" for at least 25 years.
ReplyDeleteYep, same here. I've always been astonished how blithely financial planners presume that SS will exist in some form; they're equally astonished when they learn that I never factor SS into my calculations and have been saving madly since my 20s.
All those "good" folks who elected LBJ left their kids to pay for their sin.
ReplyDeleteLot of ways to save billions and trillions. Abolish Congressional pensions effective immediately. Cut the military to actual defense. This means slashing the number of overseas bases and cutting the carrier fleet in half at a minimum. Shutdown most of the federal government.
ReplyDeletePlenty of money. Government is too big and too intrusive.
"So, if you're expecting to rely on Social Security for any part of your retirement income"
ReplyDeleteIf you're expecting to rely on any personal retirement funds, they will not be there either. Your CDs, IRAs and savings accounts will all be taken away and put into a general fund run by the government and the government will tell you how much and when you can have it back. It is already has started in Europe and they are trying in California. http://www.mercurynews.com/2017/04/01/retirement-savings-for-all-california-vows-to-proceed-despite-new-d-c-obstacle/
WB
Meanwhile the zero-interest-rate policy makes it impossible to get a reasonable low-risk return from your savings and forces people into the (way-overpriced) stock market.
ReplyDeletetexan,
ReplyDeleteall congress' benefits the same as those of the constituents.
they get plenty of baksheesh- don't need any of the specials they vote for themselves.
they can get social security same as we do and have medicare same as we do.
military for defense only--good idea.
saves billions.
cut out department of education and other useless expensive bureaus.
saves more millions.
i hate recaptcha!
The government really should remove the cap on Social Security taxes. Right now only the first $127,200 of income is taxed (I believe that's indexed to inflation, but I'd have to check to be sure).
ReplyDeleteThere is already court precedent that what you paid into SS is NOT your property and the government doesn't have to give it to you.
ReplyDeleteSee https://en.wikipedia.org/wiki/Flemming_v._Nestor for the case law, from all the way back in 1959.
I would not be surprised to see SS shrink to the point that it is functionally useless; I would more expect to see that than means testing.
Currency inflation is running about 10%/year. Anything you want to save needs to be in coins under your mattress.
ReplyDeleteKeep in mind that what gets paid into Social Security is actually twice what you see taken out of your payroll check. Your employer pays a matching amount which were it not required could instead have fattened your paycheck.
ReplyDeleteAnd that SS lockbox is crammed full of solid trustworthy US bonds backed by the full faith and credit of the government.
In other words, paper IOUs which, since the SS cash flow turned negative a couple years back, are having to be cashed in to meet current obligations.
I got considerable criticism for taking SS as soon as I possibly could with the reduction in benefit. Seems like my decision was correct.
Except that if you're still working but are under your full retirement age they reduce your monthly benefit by 1 dollar for every 2 you earn over the limit (16,920 for 2017).
ReplyDeleteWhich, again, means that high income earners get swindled (already, the more you earned the lower your payout compared to the amount you put in). Social Security benefits are already heavily means-adjusted. According to this year's figures, based on monthly income you get 90% of the first $885, 32% of earnings from $885 to $5336, 15% of earnings from there to the cap. Which is why raising the cap, without adjusting anything else, puts a lot more money into the system.
Someone who's earned the maximum amount for most of their working life can expect to get ~$2800/month at full retirement age, ~$2000/month at age 62.
Using rough figures:
Say he's been earning ~$125K/year (near the current maximum), and knows he's supposed to get the maximum benefit, so he decides to retire early and supplement SS by working part-time.
But if he decides to take early benefits, is still working part time, and earns ~1/3 his pre-retirement income ($40K), Social Security will cut his benefits nearly in half, and he'd get just over $1000/month until he reached his full retirement age. If he was working enough to get ~1/2 ($60K per year) he'd get almost nothing.
While the guy who averaged $2K/month all his working life would get $1200/month at full retirement, and $800/month at 62. And if he kept working full-time, would only reduce that to $650/month until full retirement.
If they want to make Social Security more solvent without promoting a "hang the politicians!" reaction for means testing, all they really need to do is raise the cap without raising the maximum benefit. It transfers money from take-home earnings just as effectively, but hides the details. Even *increasing* the maximum benefits but using that 15% return for the top band would transfer a lot of money to their coffers.
I can't imagine $30 trillion of anything, let alone US dollars. I think that number is written as $30,000,000,000,000.00, but I might be wrong.
ReplyDeleteSigh... Almost 'glad' I'm old...
ReplyDeleteYour employer pays a matching amount which were it not required could instead have fattened your paycheck.
ReplyDeleteOr not, could being the operative word there. Why do people assume this? Employers buy labor like Ford buys tires for trucks, at the lowest price possible. Employers simply see this as a cost, and will eliminate it. Only those people with skills in exceptionally high demand will be able to negotiate that amount back into salaries, same as today.
Yes, anyone planning to rely on their electronic retirement accounts are going to have a shock when any of the following happen:
ReplyDelete1. "For your investment safety you will be required to invest 50% of your portfolio in new inflation protected guaranteed return US Treasury Bonds yielding 3%"
2. http://www.seiu.org/retirement-security
3. 101k's after the next market crash. Think Nikkei. It's likely that #1 will happen if this occurs.
Don't bother asking how it will be paid for. Focus instead on how you will live minimally or (ideally) multi-generational.
Head to a minimal property tax state, preferably with taxes that can be minimized.
If VAT, then learn how to do and make things yourself.
Your employer pays a matching amount which were it not required could instead have fattened your paycheck.
ReplyDeleteI don't think these tax laws alter the value creation split between employee and employer that much. The amount paid here is simply removed from the amount paid as "salary".