Atlantic Capital Management

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Thursday, 12 May 2016 15:34

Could Social Security Really Go Away?

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Just how gloomy does its future look?

 

Will Social Security run out of money in the 2030s? For years, Americans have been warned about that possibility. Those warnings, however, assume that no action will be taken to address Social Security’s financial challenges.

Social Security is being strained by a giant demographic shift. In 2030, more than 20% of the U.S. population will be 65 or older. In 2010, only 13% of the nation was that old. In 1970, less than 10% of Americans were in that age group.1

Demand for Social Security benefits has increased, and the ratio of retirees to working-age adults has changed. In 2010, the Census Bureau determined that there were about 21 seniors (people aged 65 or older) for every 100 workers. By 2030, the Bureau projects that there will be 35 seniors for every 100 workers.1

As payroll taxes fund Social Security, the program faces a major dilemma. Actually, it faces two.

Social Security maintains two trust funds. When you read a sentence stating that “Social Security could run out of money by 2035,” that statement refers to the projected shortfall of the Old Age, Survivors, and Disability Insurance (OASDI) Trust. The OASDI is the main reservoir of Social Security benefits, from which monthly payments are made to seniors. The latest Social Security Trustees report indeed concludes that the OASDI Trust could be exhausted by 2035 from years of cash outflows exceeding cash inflows.2,3

Congress just put a patch on Social Security’s other, arguably more pressing problem. Social Security's Disability Insurance (SSDI) Trust Fund risked being unable to pay out 100% of scheduled benefits to SSDI recipients this year, but the Bipartisan Budget Act of 2015 directed a slightly greater proportion of payroll taxes funding Social Security into the DI trust for the short term. This should give the DI Trust enough revenue to pay out 100% of benefits through 2022. Funding it adequately after 2022 remains an issue.4

If the OASDI Trust is exhausted in 2035, what would happen to retirement benefits? They would decrease. Imagine Social Security payments shrinking 21%. If Congress does not act to remedy Social Security’s cash flow situation before then, Social Security Trustees forecast that a 21% cut may be necessary in 2035 to ensure payment of benefits through 2087.3

  

No one wants to see that happen, so what might Congress do to address the crisis? Three ideas in particular have gathered support.

*Raise the cap on Social Security taxes. Currently, employers and employees each pay a 6.2% payroll tax to fund Social Security (the self-employed pay 12.4% of their earnings into the program). The earnings cap on the tax in 2016 is $118,500, so any earned income above that level is not subject to payroll tax. Lifting (or even abolishing) that cap would bring Social Security more payroll tax revenue, specifically from higher-income Americans.3

*Adjust the full retirement age. Should it be raised to 68? How about 70? Some people see merit in this, as many baby boomers may work and live longer than their parents did. In theory, it could promote longer careers and shorter retirements, and thereby lessen demand for Social Security benefits. Healthier and wealthier baby boomers might find the idea acceptable, but poorer and less healthy boomers might not.3

*Calculate COLAs differently. Social Security uses the Consumer Price Index for Urban Wage Workers and Clerical Workers (CPI-W) in figuring cost-of-living adjustments. Many senior advocates argue that the Consumer Price Index for the Elderly (CPI-E) should be used instead. The CPI-E often gives more weight to health care expenses and housing costs than the CPI-W. Not only that, the CPI-E only considers the cost of living for people 62 and older. That last feature may also be its biggest drawback. Since it only includes some of the American population in its calculations, its detractors argue that it may not measure inflation as well as the broader CPI-W.3

Social Security could still face a shortfall even if all of these ideas were adopted. The Center for Retirement Research at Boston College estimates that if all of these “fixes” were put into play today, the OASDI Trust would still face a revenue shortage in 2035.3

In future decades, Social Security may not be able to offer retirees what it does now, unless dramatic moves are made on Capitol Hill. In the worst-case scenario, monthly benefits would be cut to keep the program solvent. A depressing thought, but one worth remembering as you plan for the future.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

  

Citations.

1 - money.usnews.com/money/retirement/articles/2014/06/16/the-youngest-baby-boomers-turn-50 [6/16/14]

2 - fool.com/retirement/general/2016/03/20/the-most-important-social-security-chart-youll-eve.aspx [3/20/16]

3 - fool.com/retirement/general/2016/03/19/1-big-problem-with-the-3-most-popular-social-secur.aspx [3/19/16]

4 - marketwatch.com/story/crisis-in-social-security-disability-insurance-averted-but-not-gone-2015-11-30 [11/30/15]

Thursday, 28 April 2016 20:23

Retirement Now vs. Retirement Then

Written by

Today’s retirees must be more self-reliant than their predecessors.

Decades ago, retirement was fairly predictable: Social Security and a pension provided much of your income, you moved to the Sun Belt, played tennis or golf, and you lived to age 70 or 75.

To varying degrees, this was the American retirement experience during the last few decades of the previous century. Those days are gone; retirees must now assume greater degrees of financial self-reliance.

There is no private-pension safety net today. At one time, when Social Security was paired with a pension from a lifelong employer, a retiree could potentially enjoy a middle-class lifestyle. In January, the average monthly Social Security benefit was $1,341. The highest possible monthly benefit for someone retiring at Social Security’s full retirement age in 2016 is $2,787.80, or $33,453.60 a year. So in many areas of this country, living only on Social Security does not afford you the same lifestyle you may have had when you were working. Elders who thought they could rely on Social Security to get by have learned a bitter truth, one we should note. We must supplement Social Security with other income streams or sources.1,2,3,4    

We carry more debt than our parents and grandparents did. It is much easier to borrow money (and live on margin) than it was decades ago. Some people face the prospect of retiring with outstanding student loans, car loans, and business loans, in addition to home loans.3

Some of us are retiring unmarried. With the divorce rate being where it is, some baby boomers will retire alone. Perhaps they will share a residence with a sibling, child, or friends; that may give them something of an economic cushion in terms of meeting daily living costs. Then again, some married households were single-income households in the 1970s and 1980s, but retirees managed.3

We will probably live longer than our parents did. In 1985, the average life expectancy for a 65-year-old man in this country was 79; the average life expectancy for a 65-year-old woman was 84. Today, the average 65-year-old man is projected to live to 91, the average 65-year-old woman to 94. Our parents could depend on the combination of Social Security, pension income, and fixed-income vehicles for a 10-year or 15-year retirement. In contrast, many of us will have to try some growth investing to keep our money growing across a probable 20-year or 30-year retirement.4

We will likely have to insure ourselves if we retire before age 65. The national average retirement age (according to a SmartAsset study of Census Bureau data) is now 63. With private health insurance becoming the new normal, that means many of us will have to find some kind of private health coverage if we retire too young to be eligible for Medicare. Furthermore, the cost of many out-of-pocket medical expenses not covered by Medicare is certainly greater than it once was.5

We must rise to the financial challenge retirement presents. During the 1980s, more than 40% of U.S. private sector employees participated in a pension plan designed to bring them eventual retirement income. In the middle of that decade, Social Security accounted for 65% of U.S. retiree income. Right now, 19% of private firms offer traditional pension plan programs and Social Security represents but 27% of retiree income.4

Our retirement will differ from that of our parents. It will likely be longer and arguably feature a better quality of life. Every aspect of our later years may become more comfortable, more bearable for ourselves and our loved ones. Retirement planning is one of the most valuable tools to assist you in realizing that goal.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.

1 - faq.ssa.gov/link/portal/34011/34019/Article/3736/What-is-the-average-monthly-benefit-for-a-retired-worker [2/17/16]

2 - faq.ssa.gov/link/portal/34011/34019/Article/3735/What-is-the-maximum-Social-Security-retirement-benefit-payable [2/18/16]

3 - blog.nsbank.com/retirement-planning-3/ [12/14/15]

4 - marketwatch.com/story/how-retirement-has-changed-in-the-last-30-years-2016-02-16 [2/16/16]

5 - smartasset.com/retirement/average-retirement-age-in-every-state [10/28/15]

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