Social Security 101: Surviving Insolvency

It has emerged from the battle of left and right wing parties that social security is under threat.

Speculated by many, the program may be unsustainable by the year 2034, which is 19 years from now.

How bad is the current state of social security?

William Baldwin, contributor from Forbes said:

“Social Security is doomed; it has more money going out in benefits than from what’s coming in with payroll taxes. The US Treasury is trying to cover costs by collecting income tax, printing money, and borrowing.”

Currently, $714 billion is going out in benefits and overheads, with payroll taxes only bringing in $646 billion.

This short of inflow is the predicted cash flow, taking the budget into account from 2010.

Cash flow graph analysis:

This data shows the clear nosedive in funds, as it meets negative figures by 2015.

Social Security has been in the red for a year, and it’s bound to get messy for those who survive on benefits.

A trust fund was initially set up, leaving aside a $2.7 billion, but it has recently been discovered that the fund doesn’t exist.

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The consequence of social security going bust

A Social Security bust means a risk to the social security payouts, and everybody’s payouts will stop – as well as vital public services facing closure.

The short-term

Benefits won’t be axed immediately, but the insolvency does mean major overhauls will be made to the Social Security Administration – particularly in the areas of benefit eligibility and payroll taxes.

Many people have resorted to drawing benefits out early, with some as young as 62.

This is because the majority are afraid of Congress making cuts, or stopping payouts.

What happened to Social Security’s trust fund?

Unlike a standard trust fund where savings are used to finance capital assets (services, businesses, etc.), the Fed instead made investments into their bonds.

If we take an example:

A fish stall holder puts away $30 a week in savings, but when his fishermen stop catching fish, he then starts using emergency funds and replaces the value with a bit of paper which says IOU – retirement.

If you are using savings to patch up the profit loss, then it’s never good news in the long term.

Eventually, this way of thinking would ultimately blitz his business, especially if the money put aside is no longer there to help.

How about the income side of social security?

Theoretically, the bond interest and a portion of income tax collections should be creating the payouts.

The following is a graph showing the growing gap between outgoings and revenues:

Also note:

There have been attempts to boost tax returns.

One example of this is the quantity of tax disclosure has gone up to 85%, from only used to being 50% in the good old days.

The population boom danger

The population boom certainly doesn’t help matters, especially with all the baby boomers now planning retirement.

The mass retirement is probably a foreseen issue as for the massive births during the baby boom years.

Let’s have a look at the population growth in the USA from 1961 – 1985:

Graph Analysis

• Not only is social security experiencing lower income, but also the after effects of the big baby boomer spike now all coming through to retirement.
• There just doesn’t seem to be any hope, unless the agency undergoes drastic measures to change their methods of business, looking at the figures.
• Future outlook:
• If they do not do anything soon, then its predicted only 75% will receive their promised benefits and the trust will be thoroughly exhausted.
• Ideas on ways that Congress could rebalance outflow and income:

The following would seem like a shrewd move by the government, however given the rate at which the population is growing they become absolutely imperative:

• Make cuts to cost of living adjustment by limiting damage to those on higher income or a legislator could play around with the formula.
• Raise payroll tax; a bigger contribution would potentially give a two-point boost on closing up revenue s
• Put up the retirement age; now being 66, if it went up to 69 then this would cut benefits by 10%.
• As Chris Christie proposition, if you reduce social security payments to retirement incomes above $80,000 (and completely stopping if over the $200,000 bracket), then less money would be wasted on those who don’t need it.
• Raise income tax from 85% to 100% on the maximum fraction benefits.

Is Congress likely to take action?

The first five bullet points are most likely to be put into movement in a diluted combination, while overall it is unlikely that the rich will be the target.

What can you do?

Find out how much your social security benefits are worth.

There’s even an online calculator available, which will apply all the formulas you need.

It can calculate the following:

• Your benefit streams of income.
• Any discounted time off you take.
• Your health and mortality.

What you should not do:

It would be a big mistake now to start claiming early, even those doing it now, could be making a big mistake by messing up their financial future.

What you can do:

Instead, focus on your career, as the benefit formula only counts 35 of your highest earning years – go 45 years and then quit at 62 (early retirement).

You do have the risk of payroll taxes going up, so that’s why it’s a good idea to start planning for early retirement.

You should consider going Roth IRA:

• IRA stands for Individual Retirement Arrangement
• This IRA is a type of retirement plan, subject to US law, which offers a tax deduction to savings under certain conditions.
• It is significantly different to other plans, as the tax break comes from withdrawal rather than on the amount saved.
• The advantages of a Roth IRA:
• You can withdraw money which is a penalty and tax-free after five years but is subject to qualifying terms and conditions.
• If you make the maximum $10,000 from earnings, then withdrawals can also qualify if the Roth IRA owner is using the savings to purchase the primary residence (also by the Roth IRA owner's immediate family, descendants, and ancestors – if they haven’t brought a home in 24 months).
• You can still make contributions to a Roth IRA, even if the holder has any other plans in place – like the 401(k) plan (do note that other retirement plans may not be tax deductible).
• In the event of death for the retirement plan holder, then his/her spouse will inherit the Roth IRA trust, and will merge if they own a separate account.
• They have higher limits to contribution (in comparison to standard IRAs); this is because the post-tax contribution is a larger equivalent to a bigger pre-tax contribution from any other IRA plans – the tax deduction will give you higher returns from your savings.
• The majority of employer funds tend to be more similar to the standard IRA plans, rather than Roth. Ultimately, you’ll diversify tax risk and gain higher returns for your pension pot.
• Large estates can also have taxes reduced.
• However, there are some disadvantages to a Roth IRA:
• You can’t use the funds as collateral towards any loans, financial leverage or any cash management tools used for investment.
• Qualifying for a Roth will be determined by your income limit, whereas the standard IRAs do not have any income limits.
• While withdrawals are subsidized in this unique plan, contributions to Roth are not subject to tax deductions – so is only beneficial for after retirement.
• It doesn’t reduce the taxpayer’s adjusted gross income (AGI), in comparison to other retirement plans where AGI can be reduced (this can benefit for minimizing taxable income) – other perks that are missed are a disqualification for deductions and tax credits. Other lost subsidies include reducing student loans, child tax credit, and earned income credit.
• The contribution set at the current taxpayer’s income tax rate – it’s the norm for the majority in retirement to see their income fall, which also downgrades the retiree’s tax bracket. The reduction of the bracket can certainly put some risk into your retirement investment (this may also be likely if Congress lower income tax rates before the retirement age). So the more traditional plan would otherwise benefit from providing immediate tax breaks.
• If a taxpayer pays state income taxes, while also paying into a Roth IRA, then they’ll have to pay the state income tax towards the contributions in the same year. But if the taxpayer retires on a lower income tax rate (or on no income taxes), then the opportunity is lost to avoid paying state income taxes – an advantage offered by the traditional IRA pension plans.

Conclusion

There are always pros and cons for doing something, so whether you go the Roth IRA route or not will depend on your personal circumstance. However, forming a private pension plan and being less reliant on the state may be thanked by your future self – especially with social security facing much uncertainty.

There are many methods for taking control of your financial future, for example, downloading an online calculator like My Money Platform.

Not only can they accurately work out your retirement age and how much you can earn, but also increase saving contributions by scrutinizing your budget.

Taking control of your finances now will offer you a much brighter retirement, where you can enjoy life and spend more time with family and friends.