Retired Military Finances 201: Should I Be Worried About Social Security?

It seems every couple of weeks or so, I see an article/post about Social Security running out of money. Should you be concerned about it? Maybe. Maybe not. So, let’s take a look. I’ll try to be objective, and I won’t get emotional about it.

How Social Security Really Works

A lot of people think that their Social Security taxes go into an account for their future retirement. That’s not the case and never has been. Social Security taxes, in general, are paid out as benefits as they come in. Said another way, current workers are paying for current retirees’ retirement. It has always been that way.

The first Social Security recipient, Ida May Fuller, received her first monthly check for $22.54 in January of 1940. She worked and paid into Social Security for a little under 3 years. She paid a total of $24.75 in Social Security taxes. She lived to 100 and received lifetime benefits of almost $23,000. Pretty good return on investment.

While baby boomers were working, Social Security brought in more money than it paid out, so the money flowed to the Social Security Trust Funds. Well, most those baby boomers aren’t working (I guess technically, I’m a baby boomer) and now Social Security is paying out more than it takes in. They’re drawing the shortage from the Trust Funds. Obviously, they can’t do that forever.

What Happens When the Social Security Trust Funds Run Out?

Under current projections, the Trust Funds will be exhausted in 2034. At that point collected Social Security taxes will only cover 81% of promised benefits. That is projected to be true until 2099 when Social Security taxes will cover 72% of promised benefits.

We’ve Been Here Before

As some of you may remember, Social Security was fixed in the 80’s (1983 to be exact). In 1982, the Social Security Trustees predicted that the Trust Funds would be exhausted in July of 1983. The Trust Funds got so low that at one point Social Security only had enough money to cover full benefits for about 2 more weeks.

Congress finally got off the dime and passed legislation to fix Social Security. It is worth noting that some of those changes are just fully going into effect now (Full Retirement Age (FRA) for those born in 1960 or later is 67…those born in 1960 are currently 65).

How Can Congress Fix Social Security Now?

There are a lot of ideas out there and here are a couple. These will fix Social Security until 2099. Also, keep in mind the longer Congress waits, the more draconian the changes will need to be.

Increase Social Security tax by 1%; Raise FRA to 68; Reduce COLA for top 70% of recipients
Increase Social Security tax by 1%; Change COLA to “Chained CPI”; Subject all wages to payroll taxes and potentially increase benefits

There are plenty of other ideas as well. The point being that there are solutions and they’re not horrible. Congress just needs to earn their paycheck and address the problem (instead of using Social Security to bludgeon the other party)

What Should I Do About Social Security Uncertainty?

If you are in your 50’s or older, I think your risk is relatively low. But you might want to see how your financial plan works out if Social Security is cut by 20%, just so you can sleep at night. If you’re younger than 50, I think you’re at greater risk of having a different Social Security benefit that current retirees receive. That seems like that is always the case. Many current Social Security recipients have a different Social Security than their parents had and their parents had a different Social Security than their grandparents had (like Ida May). So, if you’re younger than 50 you might want to plan on a later FRA and reduced benefits as you work through your plan.

One thing I probably wouldn’t do is claim early before the cuts occur (if they do). As you age would you rather receive 80% of a bigger number or a smaller number?

Bottom line: Keep your eye on it; plan for the worst; hope for the best; and take what you get.

Military Finances are Different

You and your civilian counterparts pay into Social Security differently. You only pay Social Security taxes on base pay. You don't pay it on bonuses or incentive pay. Civilians are subject to Social Security taxes on all earned income (up to the wage cap). That is just one of the ways your finances are different than a civilian. That's why we think Active and Retired Senior Military Officers and NCOs should work with a financial planner/advisor that deals with your unique issues each and every day. If you'd like to find out how we work with clients just like you, use the button below to schedule a free, initial consultation.

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