Countdown to the Social Security Crisis

Why you need to rethink your retirement income strategy

Ric Edelman: It's Thursday, May 25th, in case you haven't heard, which means you haven't been listening much to this podcast, the Social Security Trust Fund is going to be broke in 2033. That is according to the Social Security Administration's own trustees. This date, 2033, when the trust fund is broke, that's one year sooner than what they said a year ago. It's still two years later than other analysts say. Some are predicting that the Trust Fund will go broke in 2031.

So what does it mean when the Social Security trust fund becomes broke? It means that the only money that Social Security will have to pay benefits to retirees is money that comes from the Social Security payroll tax. And Social Security only collects about 77% of the money it needs to pay benefits.

In other words, starting in 2031 or 2032 or 2033, if you're a retiree, your benefits are going to get cut 23%. This is true for every retiree in the country, regardless of how much money you get from Social Security.

Now, what's interesting is that Joe Biden, during his State of the Union message earlier this year - I'm sure you recall he got Congress to all verbally agree with him during the State of the Union message not to touch Social Security. Remember, he said that it's off the table. He got everybody to applaud and stand up. He said we're not going to touch Social Security. Now, I don't think he meant that literally. I think what he meant was that we're not going to touch the Social Security benefits that people are getting.

Because think about it, if we're not going to touch Social Security at all, that guarantees under current law that there's going to be a 23% reduction in benefits.

And I don't think that's what the President had in mind. I don't think that's what all the members of Congress who stood up and applauded had in mind. If you don't touch Social Security, you're cutting the benefits 23%. If you're saying we're not going to touch the benefits, that means you're going to have to raise taxes substantially.

Now, just do the basic arithmetic on this. 67 million Americans get Social Security retirement benefits. Half of them that benefit they get every month is more than half of their annual income. That benefit cut 23% would throw millions of American retirees into poverty. They wouldn't be able to pay their home mortgage or their rent. They wouldn't be able to buy medicine or food. There's no way Congress will allow that.

On the other hand, you have millions of American workers that are facing a double-digit tax increase. Millions are going to be unable to afford that. We've got a crisis. It's brewing. And at the moment, neither the Congress nor the White House are doing anything about it.

So what do you need to do? Well, if you're a retiree, you need to see this train wreck that's coming. You need to assume that there's going to be some benefit cut in your future. And that means you need to reduce your reliance on Social Security in anticipation of that. Reduce your spending. Figure out ways to generate income elsewhere. Get a part-time gig or a job of some kind. If you're a worker, you need to start saving as much money as possible now. 

You need to reduce your expenses as much as you can now so that you aren't going to be as adversely affected when the future tax increases, which are inevitable, finally start to show up.

And there are a couple of ways that we can accomplish goals for both retirees and workers. Retirees need to look at alternative income opportunities. And workers need to save more money to generate more of a net worth in the future to help compensate for the fact that you'll have lower after-tax income in the future.

I suggest you take a look at some of the mutual funds and ETFs offered by Invesco and Global X.

Social Security. It's a big deal. It's getting ugly. And this problem is not going to go away all by itself.

You know, every week my wife, Jean, produces her own podcast. It's available at Self-Care with Jean.com and premieres each week every Thursday. Jean's really passionate about sharing her knowledge and insights with you on self-care, mindfulness and overall wellness. I know she wants to hear from you. You can sign up for her free email updates. Just ask Jean your questions. Her word of the week this week is posture and what it says about us. You can listen to Jean's podcast anytime you like, everywhere that you get your podcasts. Head over there right now, Self-Care with Jean.com.

It's Memorial Day weekend coming up. So the team and I are taking the holiday weekend off. We'll see you again on Tuesday. Happy Memorial Day. 

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