Time to Meet Sam Edmonds & Key Insights on Social Security

FIVE THINGS YOU SHOULD KNOW

1. Equity Markets – were higher this week with U.S. stocks (S&P 500) up 0.63% while international stocks (EAFE) rose 1.69%.
   
   
2. Fixed Income Markets – were mixed with investment grade bonds (AGG) down -0.06% while high yield bonds (JNK) rose 0.38%.
   
   
3. Manchin Mulls Spending Package – This week Senator Joe Manchin of West Virginia put the outlook of President Biden’s proposed $3.5 trillion tax and spending package in doubt after demanding a “strategic pause” on the proposal. Manchin argues that rising inflation and a soaring national debt necessitates a slowed approach and a “significantly” smaller plan. The Democratic Senator is considered a linchpin vote in the evenly split Senate and will undoubtedly factor into ongoing negotiations.
   
4. Global Supply Chains Still Struggling – Data from Europe this week confirmed that factories in the region saw unfilled orders rise to an-time record level as logistical problems continue to disrupt global trade, with a report out of Switzerland also noting that manufacturers have been significantly adjusting their supply chains as a result. Meanwhile, here in the U.S. distributors are struggling just to find available containers, let alone enough drivers to transport them around the country. An extended supply constraint will continue to adversely affect the cost of finished goods and apply inflationary pressures on the economy.
   
   
5. Key Insight – [VIDEO] This week’s video introduces you to Sam Edmonds, an exciting new addition to the team who is already contributing across the firm. [ARTICLE] We've heard a lot about Social Security in the news lately, specifically regarding the “fact” that it's scheduled to run out of money in about 13 years. Ben did some homework and shares some fun history, potential fixes and positive outcomes he’s come across.
   

INSIGHTS for INVESTORS

Social Security: A Conundrum of Fixes

By Ben Klundt

The death toll experienced during the Civil War posed quite a problem, especially to the widows and children that it left behind…wait…what does the Civil War have to do with Social Security? Let’s dig into the history then talk about some of the potential fixes.

Believe it or not, the Civil War was one of the catalysts to expand a federal pension program. Shortly after the start of the War in 1862, legislation was passed that would provide for a beneficiary of a deceased persons at what the deceased would have received if they were on veterans’ disability. There were multiple expansions of the Civil War Pension and by 1910, over 90% of Civil War Veterans had qualified for the pension. Between the Civil War Pensions and a massive expansion of corporate pensions during the early 1900s, these acted as the model for what would later become, Social Security.

In 1935 President Franklin D. Roosevelt signed into law the Social Security Act. This was meant to provide “additional” income to folks over the age of 65 and act as an insurance program. Social Security plays a massive role in folks’ retirement planning now and certainly has changed over the years. I won’t get into all those changes, but I will say, most were made to keep the program solvent. We could also go into the many reasons why the program is once again on track for insolvency, but we’re not going to focus on the potential negatives because, today we’re all about the positives.

So, yes, Social Security isn’t on track to be “overfunded” and is maybe running a little short on cash. Many people unnecessarily, but understandably worry this means their benefit is going to disappear. The absolute worst-case scenario discussed these days is a reduction to 76% of the current benefits paid which would make the program solvent again, and even that would likely be grandfathered in. This being said, the government doesn’t want to cut benefits for those currently receiving distributions from the program.

It’s also very unlikely the government will default when we have a printing press and a well-established status as the world’s reserve currency, which despite the fearmongering out there, isn’t changing anytime soon. That “solution” taken too far could result in purchasing power losses via inflation, but with the twin deflationary forces of technology and shrinking demographics, that too is still quite unlikely.

Here are some of the most probable changes we’ll see in the future as a “fix”:

1. Increase Full-Retirement Age: Let’s start with the one that we’ve seen before, an increase in Full Retirement Age (FRA.) When the program started, individuals were eligible for Social Security benefits at 65. By 1983 it was recognized that people were living longer than expected and returns of the SS Fund weren’t as expected. Because of this, they put into place a new full-retirement age of 66, tiering up to 67 for those born between 1954 and 1960. Crisis averted. We’d likely see the FRA increase again for younger generations with the severity of the early withdrawal penalty increased as well.
   
   
2. Removing the cap on earnings: Social Security is currently funded by a payroll tax of 12.4%, where 6.2% falls on the employee and 6.2% falls on the employer. If they were to increase the percentage of the tax by 1.6% with current caps in place, then the program would be solvent.
   
   
3. The “Donut Hole” Tax: Right now, any dollars you earn above $140,000 aren’t taxed the 6.2%. President Biden has eyed a “donut hole” tax that would keep the initial cap around $140,000 but then once you make over $400,000 the tax would be triggered again. What the tax would be at the $400,000 marker, or if it would be a progressive tax is unknown.
   
   
4. COLA Adjustments: A fourth change, which may be put into place in conjunction with the above, is a change in how they go about crediting the Cost of Living Adjustment (COLA) and a shift away from the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to a “chained” Consumer Price Index (CPI). Long story short, the latter index has increased at a higher rate than the “chained” CPI which is “chained” to inflation. This means the COLAs going forward would be less for all, even those currently receiving benefits.
   
   

How We Help

When we’re helping a client with their financial planning, our goal for them is to maximize the likelihood of success of that plan and what they can do within it. Depending on their portfolio size and spending goals, Social Security benefits often play an important role, as does the related question of when they apply for benefits. We work to ensure you know when to file and if you should file for your own benefit or a spousal benefit in order to make certain you and your family can receive the maximum benefit which fits within your goals and outlook.

I know it may seem like Social Security is on track for disaster, but hopefully the information above provides you with a little more confidence that there are solid solutions. We may not all agree on what the fix should be, but there should be a collective effort to keep this benefit in place.

Thanks for taking the time to read this, and I hope you found the insights helpful. If you have any questions regarding your Social Security benefits or how we’ve included them in your individual plan don’t hesitate to reach out. We’re here for you, client or not.

Have a great Weekend!

Ben and the Ten Capital Family

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