The Social Security Scare
Every few years we hear that Social Security will run out of money. Every few years Congress orders another patchwork of “fixes” that are supposed to cure the problem well into the next century. However, the fixes never seem to work the way they were publicized by our politicians.
Why have none of the past fixes worked long term? Simply put, Congress keeps trying to fix a toothache by giving an eye exam. i.e. Congress keeps looking in the wrong place to find the problem.
Let’s Look Back
Social Security began in 1934. It paid a monthly benefit to people who reached the age of 65.
- The benefits were paid from a tax of
- 1% paid by the employee
- 1% paid by the employer
- The tax was collected on the first $3,000 of earning. The 1% plus 1% on the first $3,000 was more than enough to pay the benefits plus, have money left over.
Today’s Social Security
Things are a little different now.
- Today Social Security tax is paid from a tax of
- 6.2% paid by the employee
- 6.2% paid by the employer
- The tax increase from 2% {1% + 1%} to 12.4% {6.2% + 6.2%} means the tax rate increased by 620%) on the first $132,000 of earnings (an increase of 44 times) and yet Social Security continues to be running out of money.
How has Congress tried to fix the problem?
- Increase the tax rate.
- Increase the base on which taxes will be charged.
- They keep tinkering with the cost-of-living formula to reduce the monthly Social Security payouts.
Sometime in early 2021, Congress will again need to address the Social Security shortfall. Bills have already been introduced to a committee that will increase the tax to 7.4% + 7.4%. Resulting in increasing the ceiling above the current $137,000 and again tinker with the cost of living formula. However, this will be like trying to fix the sinking Titanic with a roll of duct tape. It will not hold.
What is Congress missing? Simple, they are looking in the wrong place to find the villain. Even though, the problem is right in front of them. Let’s go back to 1934. Social Security only started to pay when you were very old. In 1934, Social Security started to pay at age 65. At that time, the US Life expectancy was 62. Of the people who did receive Social Security, many would die within less than one year of their first payment. Hence, Social Security was never intended to be a long-term retirement payment plan.
Today, people who reach their 65th birthday have a life expectancy of 87. I bet you know a few people who are in their 90s.
What is Congress missing? Age 65 is no longer “OLD”. Congress can keep raising taxes forever. However, as long as life expectancy increases it will never be enough.
The Fix?
How to fix Social Security once and for all? Stop pretending this is 1934! Let’s adjust the Social Security start date to a more realistic age. An age that reflects the reality of today.
The age 65 start date is still in place, however, it has been broadened to “date range” of age 62 to 70.
| Current Plan | Start for Receiving Full Payment
and Age Range |
| Age 65
62-70 |
Starting in 2021, those born in:
| Born in | Start for Receiving Full Payment
and Age Range |
| 1970 – 1971 | Age 66
63-71 |
| 1972 –1973 | Age 67
64-72 |
| 1974 – 1975 | Age 68
65-73 |
| 1976 – 1977 | Age 69
66-74 |
| 1978 – 1979 | Age 70
67-75 |
| 1980 – 1981 | Age 71
68-76 |
| 1982 – 1983 | Age 72
69-77 |
| 1984 – 1985 | Age 73
70-78 |
| 1986 – 1987 | Age 74
71-79 |
| 1988 – 1989 | Age 75
72-80 |
The above chart accomplishes two things:
- Recognizes that people are working longer.
- Provides ample time for people to prepare for the change by saving, investing, or using their IRA to build funds for their future.
In conclusion, we will get a real solution only when Congress addresses the real issue of our longer life expectancy.
IRA Club offers no investments, products, or planning services. Therefore, please consult your attorney, tax professional, financial planner, and any other qualified person before making any investments.
