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Optimal Finance Daily - Financial Independence and Money Advice
3443: [Part 1] Social Security: How Secure and When to Take It by JL Collins on Retirement Strategy
00:10:52
J.L. Collins reflects on his long-standing skepticism of Social Security, only to find it surprisingly robust as he nears eligibility
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- [00:00]
A
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- [01:12]
B
This is optimal Finance Daily Social Security How Secure and When to Take It Part 1 by J.L. collins of JLCollinsNH.com Back in the early 1980s, I remember railing against Social Security to my mother, who was on it. She'd grown up with the specter of little old ladies living on cat food. That was a real possibility when she was a girl and the elderly were the poorest group in America. I explained to her that if I and my two sisters were let off the Social Security hook, we could not only give my mom more than her monthly check, we'd have extra left to feather our own nests. She wasn't buying it, and I wasn't buying it either. I never figured Social Security would be there for me. All my financial planning has been based on the idea that if it wasn't, no problem. If it was, that would be a pleasant surprise. Well, surprise. Now I'm just a few short years from collecting, and a surprisingly hefty amount at that, considering what we've paid in and assuming we live long enough, it turns out to be a pretty sweet deal. I hadn't counted on the power of the aarp, the most formidable lobby in history. US geezers are now the wealthiest group in America. A Little Bit of History Social Security was born in 1935, during the depths of the Great Depression. Those hard times devastated everybody, but none more perhaps, than the elderly, who were no longer able to work. Even in the unlikely event work might be found, many were literally living on cat food, if that could be had back in Those days, life expectancies were considerably less. Now, figuring this can be tricky as the biggest reducer of average life expectancy is deaths in childhood. But if we look at the life expectancies of people who have survived to the age of 20, we get a more useful number. In 1935 for men, the average was around 65. For women, about 68. Since then, life expectancy in the US has continued to expand. From those numbers, it's easy to see that setting the age to collect Social Security at 65 was a pretty good bet for the system. All workers would pay in. Relatively few would live long enough to collect and then only for a few years. This worked so well, in fact, with some fairly minor adjustments along the way, that it was only around 2011 that the money flowing in stopped being more than the money being paid out. So well. The total surplus is currently around $2.7 trillion. As of September 2018, it is now 2.9 trillion. The Times are a changing, but now the wheel has turned. The huge baby boom generation that's been paying in these surpluses has begun to retire. In addition, they're living a whole lot longer going forward. If nothing changes, the system will be paying out a whole lot more than it takes in. It looks like 1935 to 2011 annual surpluses build and end up totaling about 2.7 trillion. 2012 to 2021 annual payroll taxes fall short of the annual payouts, but the approximately 4.4% interest on the 2.7 trillion will cover the gap. 2021 to 2033. The interest payments will no longer be enough to make up the payout difference and will start drawing down on the 2.7 trillion. 2033 the 2.7 trillion is gone after 2033. The payroll taxes then collected will only be enough to cover 75% of the benefits then scheduled to be paid out. Where exactly is this 2.7 trillion? The $2.7 trillion surplus is commonly referred to as the trust fund and it's held in U.S. treasury bonds. This, by the way, is about 16% of the roughly $16 trillion now. About 22 trillion as of 2018. Five years later, U.S. debt in a real sense, we owe it to ourselves. In fact, about 29% or 4.63 trillion of our 16 trillion dollar debt is owed to ourself in this Social Security, Medicare and the balance on military and civil service retirement programs. Only 1.1 trillion or 8.2% is owed to China, the creditor we hear most about. We owe Japan about the same. Does this 2.7 trillion really even exist? You've probably heard scary talk that this trust fund doesn't really exist, that the government has already spent the money? Well, yes and no. There's no lockbox somewhere stuffed with paper money. It's in a whole bunch of U.S. treasury bonds. To answer the question, is the money really there? You need to understand a bit what bonds are and how they work. Anytime an entity sells a bond, it's to raise money it intends to spend. The bond and its interest are then paid back with future revenues. This is how bonds work. As it happens, U.S. treasury bonds, what the trust fund holds, are considered the safest investments in the world, backed, as the saying goes, by the full faith and credit of the United States government. Of course, that's us, the US taxpayers, and the same folks owed most of the 2.7 trillion. So the US treasury bonds held by the trust fund are real things with real value. Just like the US treasury bonds held by the Chinese, the Japanese, numerous bond and money market funds, and countless numbers of individual investors. Yeah, well, I'd still feel better if they hadn't spent the money I contributed. And if it really was cold, hard cash and a lockbox I can draw on, well, okay. But cash is a really lousy way to hold money long term. Little by little, it gets destroyed by inflation. It's important to understand that anytime you invest money, that money gets spent. If you hold a savings account at your local bank, your money isn't just sitting in a vault. The bank has lent it out and is earning interest on it. A portion of that is the interest they pay to you. Federal law does require that banks hold a portion of deposits as cash in reserve to be able to pay depositors upon demand. If that demand exceeds the reserve. What is commonly called a run on the bank occurs because most of it has been lent out and is not instantly available. If that's an unacceptable risk, your alternative is to stuff your cash in your mattress, or, much better, a safe deposit box. Had the government done that, the trust fund would now be overflowing with currency, that is pieces of paper money backed by, you guessed it, the full faith and credit of the United States government. At least the treasury bonds pay interest. To be continued. You just listened to part one of the post titled Social Security, How Secure and When to take it by J.L. collins of JL CollinsNH.com.
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C
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- [09:18]
B
Hank.
- [09:19]
C
Yeah, you're right. Case closed.
- [09:22]
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- [09:56]
B
Social Security is an important financial topic for so many that depend on it, and while it can be beneficial to understand it, I still consider it as one of the many things that are outside of my control. I can't control what percentage of my pay is deducted to contribute to Social Security. I can't control the income caps or amount of my income that is subject to Social Security tax. I can't control that the full retirement age in terms of being able to collect Social Security continues to rise, and I can't control what the government decides in terms of how to fix the current issues with Social Security beyond who I decide to vote for. I have no idea how much will be available to me when I'm eligible to collect in 30 years or so. And because none of this is in my control, I simply don't stress about it. If I end up being able to collect Social Security one day, awesome. If not, that's fine too because I'm not considering it in my financial planning. When I think about where to focus my mental energy and effort, it's on the things I can control. I'm going to be much better off in the long run if I keep my expenses low, take care of my health, live well below my means, and invest heavily in my tax advantaged retirement vehicles. These are the things I can do right now to ensure a well funded retirement. Well, that should do it for today. Have a happy rest of your day and a great weekend and I'll see you in tomorrow's show where we'll finish up this post and where your optimal life awaits.