“We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen….” —Franklin Delano Roosevelt
The Origins
A retiring couple visited Gramps at a hospital that still had vestiges of its Catholic founding. Mumbles emerged from an oxygen mask: “…voted Roosevelt…cared for aged and disabled, voted Roosevelt…payin when markets crashin.” “Grandpa, Roosevelt’s Social Security Administration has given out monthly benefits since 1940,” said Marsha, who assured her skeptical husband Lionel that Roosevelt dolled in the rich for tax free “insurance” that also benefitted surviving children and spouses.
Average lifespan was about 64 years in 1940 and 40 workers subsidized one retiree. Lionel explained that 65-year-old couples now have joint life expectancies of 92 years. “As the Baby Boomers…retire,” writes Mark Orr, CFP, in “Social Security Income Planning,” “because of the enormous size of our group…there will only be 2 or 3 workers for each one of us taking monthly benefits.”
Fundamentally more like a Ponzi scheme than an actuarially sound system based on individual retirement needs, Social Security pays nearly half of our retirees half of their retirement income, and the oldest, like Gramps, may earn a million dollars.
Paying the Piper
Lionel protested: “I have to shell out 6.2% of my earnings as my boss grudgingly matches 6.2%.” Even little Gramps loses Social Security from summer jobs. The Tax Foundation says Social Security pays out, on average, measly 2.9% returns at around the Treasury Inflation Protected Security rates. With varying payouts, inflation rates and lifespans, comparisons to stock are hard to make. Returns are greatest for the healthy, those near retirement and lower earners.
“Ya mean I can’t take it with me?” chortled Gramps.
The Dealer always wins
“Bad investments,” grumbled Lionel. “Consider the ‘bend points’ in the PIA benefit formula, which slant payments to lower and middling earners.” Income replacement is 90% for low earners and 32% for those up to $64K, but then drops to just 15% for high earners with negative returns on investment.
“Lionel dearest,” stated Martha, “what matter returns when lives are at stake?”
Filing strategies
All agreed: “File for benefits early if your health is failing.”
Gramps: “File late if you expect a long life and cash flows to 70.” Retirees at 63 get only 70% of those at age 67, but if you work the SSA will withhold benefits—as it credits you with later retirement age. Benefits then rise by 8% a year until age 70 with planners estimating variable breakeven points (usually 80-83) and market opportunity costs.
Lionel: “Pay higher income taxes up front because the IRS taxes Social Security less than 401K’s and California exempts Social Security earnings.”
Master CFP Michael Kitches reminds S-corporation owners and family partnerships with flexible payouts to shuffle funds to those who need high earnings to raise their FICA returns on investment—people with lower past earnings in a 35-year measurement.
“Lionel, aren’t you jealous that I can remarry after age 60 and still get spousal benefits as I await age 70 to maximize benefits? If I divorce you, I can start taking spousal benefits at 63 (usually half of the higher earner’s PIA) as I reserve personal benefits for 70. And if I get retirement planning wrong,” feared Martha, “the government gives me a one year ‘oops’ rectification period.”
Social Security Prospects
Private retirement accounts reduce risks admitted by the CBO and the SSA that Social Security can’t make current payments after 2032. Martha feared benefit cuts as Lionel dreaded additional taxes. Back in 1983, government taxed benefits, increased retirement age and resisted privatization.
“Trump baby accounts,” interjected Lionel, “are tied to S&P 500 rates, which may tempt mature investors.” Marketwatch claimed: “The Social Security trust fund had about $2.8 trillion in assets at the end of 2023, and if it had invested that money in a balanced portfolio of 60% global stocks and 40% bonds, it would have earned 10%, or $280 billion, through the first eight months of the year.” Could Social Security make Middle Class millionaires?
“Over my dead body!” belched Gramps, praising guaranteed death benefits; he wondered why the rich got Social Security at all?
Robert Arne, EA, CFP, MS, of Carpe Diem Financial Life Planning, gives holistic financial advice as his client’s fee-only fiduciary. He serves mostly Santa Cruz Mountain dwellers. These articles must not be read as personal financial, mortgage, tax or investment advice; consult appropriate professionals. Learn more at www.carpediem.financial.
