In this post we discuss how we can fix Social Security and why in my opinion the expected date of it to run out, which is 2034, might be sooner than predicted. Now, important point, it’s expected that benefits will be reduced to 77% by then, but I think the shortfall in the security fund will be quicker and more drastic.
Now, why will the Social Security fall short of the expected amount?
First off, social security is a pay as you go system, which simply means social security taxes from people working today are funding people collecting social security payments. Now right the social security tax is 6.2% for employees and 6.2% for employers. Self-employed people pay the whole amount. Now one thing to point out is that about 85 cents is going to fund the Social Security recipients while the other 15 percent funds people with disabilities.
Now, there’s a few reasons I think we could easily have a serious depletion in the fund well before 2034.
(1) There’s way too much debt in the system and there’s not enough productivity and innovation. And that’s what we need to drive the economy. The Debt-to- GDP ratio is around 120 the highest it’s been since WW2, and it doesn’t seem like the trend will be reversing anytime soon. Younger generations want more work life balance. Companies keep merging and squeezing out the little guy, and we know innovation comes from small companies and competition. And sure, big companies innovate and contribute, but there are usually more layers in big corporations, and they tend to be more conservative when it comes to funding new projects.
And with our astronomical national debt, also with student debt, credit card debt and other types of debt we’re going to have a tough time down the road.
(2) Gig economy. Now, we’re seeing a lot of younger people working side hustles and multiple part time jobs, and the government is having trouble taxing these people. Now we know Uncle Sam knows this, with the increase in reporting limits for 1099k that will go into effect or actually is in effect now. So, this change in reporting from 20,000 to 600, we should expect more taxes to be taken by the government. But one thing to point out is that they are going after the little guy here and this will hurt consumption, which in turn lowers GDP and keeps the debt growing and growing.
(3) It is simply the demographics. The youngest of the baby boomer generation is about 59 years old and the simple fact of the matter is that the number of workers is less than what is needed to continue supporting payouts. People are having fewer and fewer kids. And we have seen the birth rate decline by quite a bit, and I fully expect that trend will continue.
There’s two ways really that Congress can handle increasing the balance in the Social Security reserve fund. First, is cut benefits, second is raise taxes. In the immediate future, there’s no politician that would dare cut benefits, as it would be political suicide, so we know taxes will have to increase. Now I personally believe the tax will get raised and for the most part, people won’t notice. I believe that it should get raised for large companies only, those who skirt the law with accounting gimmicks. Self-employed people and businesses should not have to pay the 6.2% like big companies.
Last point is that the younger generations, they seem to be planning better for retirement with the defined contribution plans. It’s probably fair to say DC plans are just better than DB plans, so it’s not really them. One thing to point out, those plans are heavily dependent on the stock market and in my opinion, things don’t look good for the foreseeable future. So future generations are not going to be as dependent on social security as retirees today.
What are your thoughts?
