I understand procrastination. In college I pulled my share of all-nighters before final exams, and dated my first wife for seven years before popping the question. I seem to be more motivated when I see the last few grains of sands falling through the waist of the hour glass.
Well, according to recent analyses, the last few grains in the Social Security hour glass are about to fall to the bottom. As of 2019, funds paid out in benefits from the Social Security trust will exceed funds paid into the trust. Estimates of how long it will be before the Social Security trust reaches zero vary between 14 and 16 years.
I hope that our elected representatives are willing to pull a few all-nighters to work against this seeming inevitability. However, I am not seeing a lot of midnight oil burning in the Capitol building so far on this issue. And that amazes me, because both parties have so much to lose by allowing Social Security to fail. The constituents of both parties include many prospective/retirees who are reliant on Social Security as a part of their retirement funding.
Of course, not all the blame for the inertia around this issue can be laid at the feet of elected representatives. As constituents, we have been willfully ignorant and mum with respect to this issue. Our representatives have barely heard a whisper. Now it is time for us to scream. I believe that those of us, including me, on the leading edge of the baby boomers wanted to and so did believe that Social Security would at least be there for us, and so felt no sense of urgency with respect to working to sustain our own benefits and no moral obligation to preserve the benefit as a legacy for the generations that follow.
Ask anyone among the generation that are behind us about Social Security. They will invariably shrug their shoulders and say that they don’t expect to receive Social Security benefits because the boomers are in the process of using it all up. So it is difficult to recruit them in an effort to sustain something from which they don’t believe they will benefit. They hear politicians calling for “Medicare for All.” Social Security, not so much.
So, baby boomers, whether we want to assure the availability or continuation of our own benefits and/or feel the moral responsibility to not take the last cookie out of the jar, it is up to us to advocate for Social Security sustainability. Three things we need to do:
1. Be educated with regard to what needs to be done.
2. Reach out to our elected representatives.
3. Initiate your benefit ASAP, at age 62, to ensure that you have the advantage of some benefit, while it is available, and thereby placing greater urgency for lawmakers to act, as this increased rate of benefit withdrawal will speed the second hand forward on this time bomb.
Last one first: Elected representatives have a lot to consider, broad agendas with issues that require their immediate attention. For many, 14 or 16 years seems like time enough to figure something out after they have addressed all of the issues that seem to have greater urgency. The timeline for the expiration of Social Security assumes that the distribution of benefits will continue as it has with many of us deferring our benefits beyond age 62 to have the advantage of higher payments at age 66 or 70.
Our financial advisors and accountants are advising us based on our individual needs, including anticipated longevity, availability of other retirement assets and whether or not we are still working. It is rare that such planning includes any consideration for the immanent depletion of the Social Security trust. If everyone who qualifies for benefits were to take their benefits immediately, that 14- to 16-year lifespan of Social Security would be substantially shortened, thereby increasing the urgency of the issue and, possibly, its greater resonance with policy makers.
If you are 62 now and planning to wait until you are 70 to take Social Security, that’s eight years. If the recent analyses of Social Security longevity are correct, you can anticipate receiving your benefits for only six to eight years if you wait until that time.
Second one second: Hopefully, my explanation of No. 3 creates sufficient personal urgency for you to act in your own behalf, which, collaterally, will contribute to a legacy of Social Security sustainability for your kids and grandkids. While this accelerates the urgency for lawmakers to act, they are politicians. Nothing motivates politicians like the demands of their constituents. The second step is to reach out to our representatives. Let them know that, if they continue to kick this can toward the storm drain, that that is where their political careers are headed. And you might be persuasive in recruiting your kids and grandkids by suggesting that without that Social Security check, you’ll have to move in with them.
Finally, first one last: Show our representatives how it can be done. Some of the suggestions for shoring up the Social Security trust are:
—Raising the age of entitlement. When Social Security began, longevity actuarials suggested that many folks would not live long enough to collect their benefit, and that those who did would not collect for more than three or four years. So, for those who lived to collect Social Security, the liability to the Social Security trust was payments from age 62 to age 65. Now, if a Social Security beneficiary initiates her/his payments at 62, the liability to Social Security is 18 years, age 62 to age 80. There would be little pushback from the 45-year-olds if for them the age of entitlement were pushed to 76, since they don’t expect to have the advantage of any Social Security benefit anyway.
—Increase contributions from the current 12.4 percent of income, half paid by employee, half paid by employer, to 15.6 percent, the amount contributed by German workers and companies into their national pension equivalent.
—Increase the income limit on contributions from the current $132,000. There is current domestic precedent. Medicare increases contributions by employees, not employers, on income above $200,000 by .09 percent.
—And, invest the money! Our Social Security system is the only major pension plan that I have found that does not invest its assets. The funds are held in a hybrid security that represents a combination of Treasury bills (short-term), bonds (long-term) and notes (intermediate term). As I write this, the 30-year bond is yielding ~1.9 percent, and the two-year note is yielding ~1.76 percent.
So here’s a test of your patriotism. Would you loan your IRA or your 401(k) assets to the government for less than a 2 percent return? Come on! Put some stars and stripes into your retirement portfolio. America needs your money! We need to fill the debt gap left by China, as they sell our bonds. Or, perhaps, you might fall into the category of investors who believe that the best way to support our nation is to invest in the companies that contribute to its wealth. While I salute the flag, pay my taxes and vote, I confess that my patriotism does not extend to philanthropic contributions to our Treasury.
The German social security system thrives relative to our system more as a result of investment policy than as a result of greater employee/employer contributions. It would also fail, if it followed our Social Security “investment” policy, because while our Treasury bills, bonds and notes are currently yielding a little less than 2 percent, the German equivalent is at .033 percent. Instead, the German Social Security system is thriving because it invests its assets in the stock, bond and real estate markets, much like CalPERS, the largest pension plan in the U.S., next to Social Security.
CalLPERS has its issues with unfunded values and taxpayer liability. However, these are more political than financial issues. The fact is that CalPERS has averaged ~6.90 percent over time, very close to its 7 percent discount rate, or the rate at which it must perform in the future to not leave the taxpayers holding the bag. CalPERS does not manage the money itself. It oversees the investments by outside asset managers.
So, my proposal would require that a percentage of the Social Security trust be similarly invested in the broader markets through pooled assets managed by professional asset managers vetted and supervised by an asset management board composed of bankers and economists in addition to Treasury representatives. Treasury bills, bonds and notes would be exchanged for stocks, bonds, real estate, etc., at a rate of 2-3 percent per year, up to a maximum to be determined by the board. The markets could support commitments at this level and would welcome them.
Such a plan would be a win for both political parties. Democrats want to sustain entitlements. Republicans want to eliminate taxes. The fact that the government is borrowing the money currently within the Social Security trust is in effect a tax to the extent that we support the interest payments with our taxes.
And, Republican support for this entitlement is not unprescedented. Thirty-six years ago, Ronald Reagan signed legislation into law that would help in sustaining Social Security. Upon signing, he declared: “This bill demonstrates for all time our ironclad commitment to Social Security. It assures the elderly that America will always keep the pormises made in troubled times a half a century ago.”
