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What Does Social Security Insolvency Mean? · How to Retire on Time

• 0:05
  Mike: Welcome everyone to the Retire On Time q and a. I'm Mike Decker, author of the book, How to Retire On Time. And with me is David Fransen, the one and only. Also, if you... For the many of you that keep coming back, we appreciate that.
• 0:17
  You might notice David's growing some facial hair. I'm gonna call it out here. He's gonna be a Viking for Halloween. Yep. So I'm dedicated.
• 0:25
  That's that's a costume.
• 0:27
  David: That's right. I'm not gonna put on a fake beard here.
• 0:29
  Mike: I'm the guy that... I'll put a paper clip right here and call myself MacGyver. Minimum efforts. But you're you're committed. Anyway, thanks for joining us.
• 0:37
  This show is all about getting into the nitty gritty, not the oversimplified advice that you hear over and over again online. You know, the stuff that might be right for someone, but maybe not you. We wanna we wanna bring context into the conversation. So put your questions in the chat. Chat's live.
• 0:51
  We're gonna see it right here. I'm taking one one at a time. I'm gonna talk about Social Security as many of you are here to hear kind of some comments about Social Security, so we'll bring that up. Just remember, this is a show and should not be considered financial advice. I don't know your situation, so we're talking broad strokes here.
• 1:08
  We're we're giving different situations and all of that, but just, you know, don't the purpose of planning is to actually get individual advice. So it's appropriate for you. It's... I don't know. This might be a weird analogy.
• 1:20
  But you don't hear about a medication and just sign up for the medication. Now you go see the doctor first. Mhmm. And is the medication right for you or not? Or is there a better healing path or not?
• 1:29
  These are things that are important, especially in retirement planning. So hopefully you appreciate. Yeah. A lot of opinions out there. That's my opinion.
• 1:36
  David: Oh, man. Yes. That's a great opinion.
• 1:38
  Mike: Thank you.
• 1:39
  David: I like your opinion. Thank you for being approval. Absolutely.
• 1:42
  Mike: And as always, if you wanna start the planning process, if now is the right time, you can always go to retireontime.com/call. Schedule a call. The first thirty minute call is free. The... If you wanna start the planning process, the first three sessions don't cost you anything.
• 1:56
  We we show you planning looks like before you commit to anything. So that's always available to you. Retireontime.com/call. Let's get into the stuff. Alright.
• 2:05
  So here's the deal. Okay? Social Security. A lot of headlines out saying it's going bankrupt. Let me know in the chat if you think that's, true or not.
• 2:12
  Today's group, the second most, or second top concern for this group is Social Security insolvency. That would make sense given the topic. Well, there's also inflation and taxes going up. So we'll talk about those. Thanks for filling out that poll.
• 2:27
  Social Security today. It's kind of a big deal. Most retirees, in my opinion at least, and based on my over my decade of doing this, depend on Social Security.
• 2:39
  David: Mhmm.
• 2:39
  Mike: Now let's be very careful about the word depend. It's not that they're only living off of Social Security. It's that if Social Security went away, they may not have saved enough to be able to afford retirement.
• 2:51
  David: So they're counting on that as a part of their plan.
• 2:54
  Mike: Yeah. So let's do a simple example. Let's say you've got a million dollars and you're gonna take about 40,000 or 50,000 or so from your your portfolio. Okay? That you couldn't live off of 40 to 50,000.
• 3:07
  You might need an extra $40.50, 60,000, which you're counting on from Social Security. So it's kind of a big deal. Yeah. Also, there's this entitlement, and I don't mean that in the negative sense. The entitlement, you've paid into it.
• 3:20
  Now it's your time
• 3:22
  David: Right.
• 3:22
  Mike: To receive your benefits. Because if you don't get your benefits, it kinda feels like a Ponzi scheme. Mhmm. Can we say that?
• 3:29
  David: Yeah. Well, we just did. But... Yeah. I mean, yeah.
• 3:32
  All the decades of work you've been doing and and you've got your pay stub and you saw it coming out. So you you want that. Yeah. You've earned it.
• 3:40
  Mike: Yeah. So here's the the truth of what's going on. These are the actual numbers. Okay? Social Security.
• 3:47
  Based on the last time I checked, you know, the last couple of weeks or so, FICA tax. So, you know, federal income tax and all that. That FICA tax is what pays for 83% of Social Security benefits in the preceding year. So money goes in and it goes out.
• 4:07
  David: So in our minds, we we might think, oh, they're that and they're holding it for me somewhere else until I retire and then they'll give it to me.
• 4:14
  Mike: That's exactly what's happening. Uh-huh. For the trust part, which is only a small part of
• 4:18
  David: it. Yeah. Okay.
• 4:19
  Mike: So when you see... When you hear Social Security insolvency, that's a scary word. Mhmm. It doesn't mean it's going away. It means that the trust account that has bridged the gap of total benefits owed versus the revenue coming in might go away.
• 4:36
  David: Okay.
• 4:36
  Mike: In other words, you might get like a 15% simple math, 15% or so reduction of benefits. Would that be devastating? For some people, yes. For most people, probably not. So I I hate when you have a society that online gets paid by clicks.
• 4:57
  Because what do you wanna do with your clicks? You want the article that scares the crap out of you and you share it with five other friends.
• 5:03
  David: Oh yeah.
• 5:04
  Mike: So that you get the advertising dollars.
• 5:06
  David: Right.
• 5:06
  Mike: We're incentivized to write fear based articles. Gets more clicks. Mhmm. That's why the news, at least in my opinion, focus more on the negative than the positive. Imagine if we had positive news network.
• 5:20
  Yeah. Right? Little spin off of CNN, and that's not a criticism of CNN. But but just imagine if that were like, your world view would be like, oh, here's all the good that's happening. Things might be good.
• 5:32
  Instead what happens? We tune in and it's all the things that are wrong. Right. I'm not saying you should put on the rosy covered glasses and only look at the good. It's good to be aware of also the bad.
• 5:42
  Mhmm. Kind of affects us. But it disproportionately puts us into a fear based position, which then creates fear based outcomes. Mhmm. We don't wanna do that.
• 5:54
  So Social Security, 83% is covered by FICA tax. It's not as dire as the word insolvency might would... Might suggest.
• 6:02
  David: Oh, So Wade, what you're saying then is that as long as people are working and have jobs and they have like deductions from their paycheck, then there's still money gonna be going in and Yeah. Paying retirees.
• 6:14
  Mike: Yep.
• 6:15
  David: And so we probably think that most people will continue to keep working, right? Unless we are listening to all the AI bosses out there who say that AI takes all the jobs and we're all just...
• 6:26
  Mike: But that would be interesting. If AI took all the jobs, then we don't have Social Security. We have a universal income system. Right. That's a whole another thing.
• 6:33
  David: Yeah. That's that's a big rabbit hole.
• 6:35
  Mike: Right. Yeah. And I don't... Let me know if you want me to go down that rabbit hole today or not. Yeah.
• 6:39
  That's not the point of our conversation today. But and then disability, a lot of people are worried about disability. What about all the people on disability? That's a whole separate trust account. A whole separate situation.
• 6:51
  And that is not a solvency issue as I understand it today. As I've done the research on this today. Mhmm. So it's not disability. It's mostly gonna be mowed on on Social Security benefits.
• 7:02
  David: Okay.
• 7:02
  Mike: Alright. So now, let's let's play... Well, a couple of other things too. Social Security is expected to have a cost of living adjustment each year.
• 7:12
  David: Cola. They call it for sure.
• 7:13
  Mike: Yeah. Not Coca Cola.
• 7:14
  David: No. But... Although we do like that.
• 7:16
  Mike: And we're just doing cheap jokes today. Yeah. These are like dad jokes. They're just terrible. Yeah.
• 7:21
  Someone's rolling their eyes. But the... So the the cost of living adjustment isn't based on your CPI, the the consumer price index. That's how they track inflation.
• 7:32
  David: Mhmm.
• 7:32
  Mike: It's based on the CPI w.
• 7:36
  David: Yeah. Which is?
• 7:36
  Mike: Which is workers' compensation.
• 7:39
  David: Okay.
• 7:39
  Mike: So in essence, you could say or suggest that as FICA tax increases, they're able to also sustain the cost of living adjustments as well. Like, it kind of it's kind of tied at the hip. Okay. That's a very oversimplified response to basically suggest, yeah, your most of your benefits at the worst case scenario are probably gonna be okay.
• 8:01
  David: Alright.
• 8:03
  Mike: But that doesn't get clicks.
• 8:04
  David: Yeah. I I haven't seen that story yet that come across my newsfeed.
• 8:08
  Mike: Yeah. It's all about selling you something. So anyway. Alright. Couple of important things though on there.
• 8:14
  So potential solutions. I don't... Are you a reader? I don't think you're much... I have been...
• 8:23
  A synagogue. You like the movies,
• 8:24
  David: not the books. In some portions of my life, I've been a reader, but currently, no.
• 8:29
  Mike: Have you ever read the updated congressional budget office manuscripts?
• 8:34
  David: That sounds like required reading. That sounds really fascinating, but no, I have not.
• 8:39
  Mike: So if you were to read it, comes out every few years. It's basically the budgeting office of congress with proposed tax legislation that they can literally copy and paste, put it into an act, and solves an issue. Congress... These people aren't just coming up with ideas out of thin air. They're saying, okay, I want to pay for this.
• 9:01
  How do we do it? We'll take this line of tax code here or this new tax law, this adjustment of tax law, put it in here, copy paste done. It's kinda like old school AI. You know, you need to copy a paragraph from Wikipedia. They need to copy a paragraph from this article here, you call that your report.
• 9:17
  David: Oh, yeah. Yeah.
• 9:18
  Mike: Right. That's that's kinda how it works.
• 9:20
  David: Okay. Right.
• 9:21
  Mike: They're not just fabricating these grandiose ideas. And so if you read this stuff, which most people don't, and I don't blame them for that. Yeah. There's a lot of interesting... I I have some notes in here, but here's just some of the basic ones.
• 9:33
  And notice how easy it would be to implement some of these.
• 9:36
  David: Okay.
• 9:37
  Mike: Increase or eliminate the taxable minimum of FICA. Did you know that if you earn a certain threshold, anything above that doesn't really count for FICA?
• 9:45
  David: So if you're like a really high income earner, only a certain portion up to up to a ceiling actually gets to, like, withdrawn for Social Security.
• 9:54
  Mike: Yeah. What if we got rid of that?
• 9:55
  David: Income above that isn't subject to a
• 9:57
  Mike: Tax the rich. That's what people love to hear. Yeah. Whether you agree with that sentiment or not. The rich are already paying most of our taxes, but hey, let's tax them a little bit more.
• 10:06
  Yeah. But that's a small amount might sneak in there.
• 10:09
  David: Okay. So we could eliminate that cap and just tax it all the way to the top.
• 10:13
  Mike: That would help. Okay. Yeah. We could increase payroll tax. That would put burden on the businesses, but we we could do that.
• 10:18
  Mhmm. We could adjust these Social Security taxation benefits. So this is called the provisional income tax. It's a calculation that taxes a part of your Social Security.
• 10:27
  David: Oh, right.
• 10:28
  Mike: But we could just get rid of that and say everyone gets 85% taxed.
• 10:31
  David: On Social Security benefits?
• 10:33
  Mike: Or just... It's all taxes income. Oh, right. They could just do that. This is legislative risk that retirees face.
• 10:40
  David: Oh, yes. Yes.
• 10:41
  Mike: Gradually raise full retirement age, which I think this one's a little more likely. Though it's political Yes. Can I say that word? Yeah. You can.
• 10:49
  YouTube might not like it.
• 10:50
  David: We just have to put a little disclaimer probably that we mentioned that word or something.
• 10:54
  Mike: It is not politically smart Yeah. For anyone that wants a career longer than their current term Well, yeah. To increase the full retirement age. Because what would that look like? You don't get your benefits until let's say 70 years old
• 11:07
  David: Mhmm.
• 11:07
  Mike: Unless you retire soon. Because you can't take Social Security benefits and or sir receive w 2 or $10.99 income. Doesn't work that way. You'll have... It's a...
• 11:16
  There's a calculation that will reduce $1 of your benefit for every $2 you earn above a certain threshold.
• 11:23
  David: Okay.
• 11:24
  Mike: But they could kick that back that would alleviate a lot of the pain.
• 11:27
  David: And remember, what was it a few years ago when they tried that in France and everybody rioted?
• 11:31
  Mike: Well, France is riding right now anyway. So Yeah. Maybe they just riotous people.
• 11:36
  David: They... Yeah. They got a strong tradition in that.
• 11:38
  Mike: Yeah. But they don't win until... What was it? Napoleon was the last
• 11:42
  David: time that they won. Oh, the poor French.
• 11:45
  Mike: Yeah. At least they make good food.
• 11:47
  David: They do. They're wonderful.
• 11:48
  Mike: Yes. I love
• 11:49
  David: French people. Disparage them. That's...
• 11:51
  Mike: Yeah. Just feel bad for what's going on.
• 11:53
  David: Yeah. But... Yeah. So bottom line, you could raise the retirement age to help solve this Yeah. Shortage.
• 11:59
  Mike: The next one is to reduce benefits from higher income earners. So a lot of people don't understand these calculations that the PIA calculation or the bend points. In other words Okay. Social Security is a very progressive system. In that, and that's the literal definition of progressive, that your benefits are progressively better the less money that you make.
• 12:22
  Mhmm. So the first point, like every dollar is really helping you contribute to your Social Security benefits through the PIA calculation. However, the more money you earn, there's certain bend points or thresholds to where less dollars are contributing now to your Social Security benefits. So high income earners aren't earning as much. Well, you could just continue to reduce those benefits.
• 12:45
  So more goes into the Social Security trust, and those higher income earners are just gonna get less overall.
• 12:51
  David: They'll get less when?
• 12:53
  Mike: When they file for Social Security. Oh, Their benefits will just not be as great.
• 12:57
  David: And this is a proposed rule, and it's it's not currently in effect?
• 13:01
  Mike: Their ideas. These are brainstorms of
• 13:03
  David: Oh, I see.
• 13:04
  Mike: From the congressional budget office and others.
• 13:05
  David: Yes. Yes. So that's... Yeah. Okay.
• 13:07
  Mike: None of this is current legislation being proposed by
• 13:10
  David: the way. Okay. Right. Right. Yes.
• 13:11
  Mike: But they have the playbook that they could implement. Yeah. Whether they decide to or not. And then expand investment funds. This is this is what I kinda like.
• 13:21
  So right now, the Social Security Trust is mostly treasuries. I think it's actually all treasuries.
• 13:29
  David: Okay. Meaning that the the the money comes out of your your paycheck and it sits in it and it's used to purchase a treasury. Yeah. So it earns whatever the Yeah. The rate is.
• 13:38
  Mike: Do you remember what treasuries were ten years ago?
• 13:40
  David: Of a percent? Yeah.
• 13:42
  Mike: Yeah. Okay. Not very much. Yeah. So why are we lacking trust benefits?
• 13:49
  Oh, maybe because we put it in something that was barely keeping up with inflation or didn't even keep up with inflation for a while.
• 13:54
  David: Right.
• 13:55
  Mike: That was a good idea. And it's... This is not hindsight is 2020 by the way. I've been saying this stuff on radio for years. The youth call, I've got the receipts.
• 14:09
  Anyway. So... But yeah. What if you just put 20% of it in a government made index that's equal distribution of American publicly traded American socks or something like that.
• 14:22
  David: Okay.
• 14:24
  Mike: That would alleviate a lot of issues. That would... And yeah. Yeah. It might go up and down, but maybe you don't need all of the money this year or in the next five years.
• 14:32
  You're starting to think as a long term investor, kinda like a pension fund. We didn't treat Social Security, which is basically a government forced pension. Yeah. Like a... It just...
• 14:42
  David: Like a regular pension.
• 14:44
  Mike: Yeah. But I mean, hear me out. Social Security is a very wonderful program. It's helped a lot of people. Mhmm.
• 14:51
  Okay. I don't wanna disparage it. I do not believe it was managed well. I do believe we could have done a lot of things along the way, but here we are. Yeah.
• 15:00
  But just know, most of social security is funded by last year's FICA tax. Just know that there are plenty of ways that they could pass a bill and fix a lot of these issues. I cannot see a... With 99% certainty, and based on my opinion, I cannot see social security going away. Because FICA tax pays for a lot of it, and what politician wants to be there when social security goes away?
• 15:31
  Like they have to fix it. Yeah. It's just a hot potato that they keep passing. I don't know. These are my thoughts.
• 15:39
  So let me know in the chat what your thoughts are if you want to go down a rabbit hole of anything we've talked about so far. But let's do talk about optimization. Because you have to kinda compare, okay, well, if Social Security had a 15% reduction versus what if Social Security stayed around for a while, and then when do you file and how does that affect other parts of your plan? In other words, do you want to make a filing decision based on the idea that maybe politicians don't get it through, Or do you want to maybe delay your social security so you have more room for IRA to Roth conversions if that's appropriate for you and it's not appropriate for everyone? So that you don't run into required minimum distribution issues.
• 16:21
  See, what's the consequence of those taxes and what's the difference between those taxes and a 15% reduction of your benefits? I have yet to hear an adviser ever make those arguments or even suggest those calculations. But in my mind, that's more holistic planning.
• 16:40
  David: Mhmm.
• 16:41
  Mike: Right? Yeah. Then you have to ask the other part. Well, what if I don't need IRA to Roth conversions? Maybe you've saved a little bit less from the portfolio.
• 16:47
  Okay. You're gonna retire at 62 years old. Got it. Do you really wanna wait until 70 years old? Well, maybe.
• 16:55
  But maybe you wanna file it like 64 years old so there's less pressure on the portfolio. It's not
• 17:00
  David: a
• 17:00
  Mike: tax planning issue though tax planning might be a big deal. It's not necessarily a longevity. You you... Yeah. You want the benefits to be there, but you're just trying to balance out this income versus portfolio versus future health care costs versus social security risk, and so on and so forth.
• 17:20
  There's a lot to consider when you file for social security. Now the workshop, and I'm doing one tonight. If you're not registered for the workshop, go to retireontime.com/workshops. You know, register. It's at 06:30 central time tonight.
• 17:33
  One of the points that I make is we run the first version of your plan in the first ten minutes. Everyone does this at home. We answer once one quick question. Can you afford to retire on time or not? That's it.
• 17:44
  David: So that question will be answered tonight. If you
• 17:46
  Mike: It's tune implementation workshop. We actually wanna do things. Then I point out, okay, everyone just ran your plan. You've made at least 11 decisions already. Just by clicking the button that says run plan.
• 17:59
  Do you realize you're making 11 plus decisions just by that first projection? And then what are the consequences if you move one thing, it affects all the other 11 ideas. These are the things that we need to be aware of when we look at social security optimization. It's not just how do get the most out of the government. It's not just I think the government's gonna, you know, explode and so therefore, you know, I don't actually mean explode.
• 18:26
  Yeah. You know, please don't raid my house, FBI. Oh, yeah. I'm saying that the politicians won't get certain policies through. Right.
• 18:34
  I don't know. Maybe this is too tongue in cheek.
• 18:37
  David: Just imagined the death star exploding when you
• 18:39
  Mike: said that. Nope. We we don't wish any of that on anyone. No. But I mean, if they don't pass certain things, like that that could hurt.
• 18:48
  But you just have to you have to take a step back and say, are you... What's your primary objective? And what do you want your plan to look like? Assign the mission to your dollars, and then run various scenarios. Explore various strategies.
• 19:04
  It's like clockwork. Once you start having a more open conversation and you start prioritizing things in the correct sequence, it becomes very obvious which strategies take precedent over other strategies. And it's not how do you pay the government the least amount of money. It's not how do you get the most out of Social Security because sometimes that's jumping over dimes to pick up pennies.
• 19:28
  David: Mhmm.
• 19:29
  Mike: And you want the whole plan to work together to maximize your benefit, your quality of life, your goals, whatever they might be. So let me know the chat if you've got questions or to elaborate on anything. Appreciate you all being here. We're be answering your questions as well. Submit the questions either in the chat or anytime during the week.
• 19:48
  Retireontime.com/ask. If you're listening in on this and you're going, gosh, I wanna do on my own, but I just want some guidelines. Look, if you go to retireontime.com, subscribe to our newsletter, you'll be a part of our first wave of our public subscribers. This is something we've held for our private clients. This is something we've been holding for a very special group of people, but we're making it more public for for anyone that wants access.
• 20:13
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• 20:34
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