Social Security: A Reality Check

You ask a Millennial about Social Security and he’ll tell you, with the utter certainty that Millennials everywhere can’t help but feel, “it won’t be there when I retire, so what is the point; and why should I pay into it when I won’t get anything back?”

And, of course, he is right.  If nothing is done to change how Social Security is collected and disbursed, it surely will go bankrupt well before our Millennial retires.  It is an excellent example, too, of a self-fulfilling prophecy, as Social Security will die for sure if enough Americans believe it is doomed, beyond rescue.  Because if you are sure it will die, why would you waste time and energy trying to save it?

The Challenge of Retiring without Social Security

So, what is our Millennial to do to prepare for retirement in a world without Social Security?  How can he reach retirement age and be prepared for it, financially speaking, without the cushion of Social Security?  Here are some of the best ways to accomplish that goal:

1. The best way, of course, is to become the next Mark Zuckerberg (founder of Facebook; 33 years old and worth $50-75 billion).  If you read up on him, you will see that it wasn’t luck (how smart he is was luck, but his early years seem primed for immoderate success).
2. Along the same lines, become a very successful entrepreneur.  Or doctor.  Or lawyer.  Or real estate tycoon.  Or sports figure.  Or entertainer.  The key factor here is “very successful” and we will tentatively define that as earning a few million dollars by retirement age or before (and not squandering or losing it).
3. The next best way to prepare for retirement is to work for a Fortune 500 company that has a generous pension plan, work there your entire life, and climb the ladder of managerial success, to CEO, CFO or COO, etc.
4. Win the Lottery.
5. Marry “UP.”
6. If you won’t have the luck to achieve any of the above, do this.  Be religious about saving a significant amount of your income every year and placing it in an Index Fund or two (do NOT try to out-guess the market, it will cost you time and you will fail); then pray for 5-7% annual growth long-term.  Compound interest can produce amazing results, given enough time to grow.  Do NOT sell your investments after the market seems to have collapsed, it is usually just a “correction.”  And beware of watching your retirement portfolio every day, as you will surely die from stress before you reach retirement age.

The problem with these suggestions is, of course, that most of us will not have the luck or talent to achieve any of the first five items on the list.  Preparing for retirement by saving and investing (item#6) is the most sure-fire way to succeed, if you were not born lucky.  But it will require self-discipline and, yes, luck.  For example, if you save steadily for 40 years (e.g., age 25 – 65), put away 12.4% (the rate that Social Security would have withheld from you and your employer) of your gross income, and the market lets you realize net annual growth of 5% (market appreciation less inflation), you will be able to retire at 100% of your average wage for 25 more years (until age 90) (you can test retirement scenarios with my simple retirement calculator.  Keep in mind, it will be easy to create winning scenarios if you input unrealistic assumptions).  Good deal, yes?  But it will take enormous discipline to save that kind of money steadily (Will you start NOW?  Will you be able to resist the temptation to spend for NOW instead of saving for THEN?  Will you be able to save for retirement while you are saving to put your kids through college?  Will you be able to remain calm in the midst of a market down-turn?).  Finally, the weakest part of this model is its assumption that you will be able to work until retirement age with an ever-increasing annual wage, in the face of cheaper foreign labor and the rush of technology (automation, Artificial Intelligence and robotics), a not altogether likely assumption at best.

The Reality Check

OK, you know what you have to do to make it through your Golden Years without the support of Social Security; but what are the odds?  Let’s look at reality, 2018-style.

1. The United States has 500 – 600 billionaires (net worth of $1,000,000,000 or more).      That is roughly one out of every 600,000 Americans.  Not gonna happen, forget it.
2. The United States has roughly 15,000,000 millionaires (net worth of $1,000,000 or more).  That is one out of every 22 Americans, slightly more than 4% of us.  Not that incredibly rare, but good luck being one of them.  According to most, the easiest path to become a millionaire is by saving your pennies and investing them (see item #6, above).  Unfortunately, it is (American) human nature to spend what you earn and go into debt if you don't earn "enough."  In consequence, many if not most Americans who earn several million dollars over their life-time don’t save enough for an easy retirement.

That was the good news: if you’re talented, lucky and disciplined, you can land in the millionaire camp, and have enough saved for a happy retirement.

But here is the bad news.  The vast majority of Americans have negative net worth, zero savings, or not enough saved to last them more than a few years into retirement.  Look at these articles:

• Here's how many Americans have nothing at all saved for retirement
• Retirement Statistics
• Average Retirement  Savings Statistics

Clearly, the best way forward is to beat the odds.  And while you are doing that for yourself and your family, do this for the rest of us: make sure that the folks you elect to national office work to guarantee the survival of Social Security into an uncertain future.

How to Guarantee that Social Security Survives into an Uncertain Future

Here is what needs to be done to make Social Security permanently sustainable.  Easy to explain, just not easy to do politically.

“OK, how?”

“Eliminate the cap and means test disbursements.”

“Huh?”

Social Security taxes gross income on all wage earners at 6.2% (2018) with a matching tax on his employer (if a wage-earner is self-employed, he is responsible for both parts for a total tax of 12.4%).  However, there is a “cap” (an upper limit) on withholding Social Security on wages above $127,200, after which the Social Security tax is no longer assessed.  This “cap” only benefits those who earn more than $127,200.  At 6.2%, a top wage-earner pays $7,886.40 (2018) into Social Security (quite a nice bit of loose change, no?).  But the man who earns $250,000 pays the same – $7,886.40.  The CEO of a major corporation, with a $5,000,000 wage, also pays the same $7,886.40 (his paycheck will stop withholding Social Security in mid-January).  The Social Security tax is “regressive,” as it taxes low-wage earners at a higher effective rate than high-wage earners.  One of the definitions of regressive is – unfair.

As to “means testing disbursements,” does a multi-millionaire really need to collect “his” Social Security check?  What good will an extra $31,668.00 (the maximum annual disbursement, 2018) do in a millionaire’s pocket?

“But he earned that money.”

Well, no, Social Security is not a bank account, it is not money you are saving for YOUR retirement, it was never set up to work that way.  Social Security is a “social safety net” program, a government program that redistributes money from able-bodied working people to disabled and retired people, a form of insurance that is designed to allow people to thrive with dignity when they retire, that is “pay as you go” (some pay, others collect; young workers pay, older retired folks collect).  And really, very wealthy people don’t need the extra spare change.

Those who claim that Social Security is going broke are correct, and the reason is inescapable: when the program started, there were many! workers supporting each retiree, now there are fewer than three!  So, without adjusting to this reality, the program is doomed to fail.  Republicans would like to replace the federal government’s Social Security program with a “privatized” version (where each person’s contributions go into their own accounts).  This solution has two essential problems, however: one, as soon as workers begin to divert their contributions to their own accounts, current recipients would have to be paid out of a huge increase in annual deficits; two, putting aside the discipline needed to save on your own, most (too low-wage) Americans can not afford private retirement insurance, can not afford to put aside any part of their wages for savings.

The fix is easy, the politics is not.  Partly because many people don’t understand what you just read.  Think about that!

The unhappy reality is: most of you – college graduates and otherwise – will need the extra cash that Social Security provides when you retire.  So, you’d better park your cynicism, get on board and fight for it to survive.  Because it won’t save itself!

The Rules of the Game

One final point.  If your retirement should prove difficult, a large part of the cause will be the Rules of the Game.  Capitalism may be our state religion, but it is also the state religion of most countries on Earth.  Every country has its own Rules of the Game, all within the capitalist tent.  Our 21st century American rules lead here (watch video) 

Americans – the most “successful” Americans – wrote those rules, and Americans – like you and me – can change those rules.  Join the resistance, work toward change.  The world that you live in when you retire will be the world that you have chosen by your actions or your inactions today.

Organize!  Act!!

Addendum:  Wednesday, 09/09/2020
"A Payroll Tax Holiday"  "Cutting the Payroll Tax"
Politicians can be low-life swine.  The "Payroll Tax" is code for the Social Security tax (or FICA tax).  The Payroll Tax funds Social Security checks.  Payroll Tax In, Social Security checks Out.  If you "cut the Payroll Tax," you're cutting Social Security's ability to survive.  These low-lifes call it that – instead of calling it by its real name, a Social Security tax cut – because they know that most Americans would be in open revolt if they knew their Social Security system was being attacked.  Don't be fooled!

Lest I forget!  "Eliminating the Cap" has a very serious loophole.  "The Cap" references "Taxable Income."  But the wealthiest Americans have little or no "income" that they declare; their wealth is in their wealth, not in their income.   What is Jeff Bezos's (not Amazon, which is a business while Bezos is an individual, who owns only 11.2% of Amazon) Taxable Income?   What does he declare as his personal income?  Anything?  $81,000?  Unlike you and me, Bezos invents the amount he will declare as Taxable Income (subject to the Federal Income Tax, subject to the Social Security Withholding tax).  Unless we fix THIS – unless we tax wealth – "Eliminating the Cap" will NOT solve Social Security's problem.  See my essay A Wealth Tax.